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Simple Interest Formula:
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Simple interest on Certificates of Deposit (CDs) is a straightforward method of calculating interest earned where interest is calculated only on the principal amount throughout the entire term. Unlike compound interest, simple interest does not accumulate on previously earned interest.
The calculator uses the simple interest formula:
Where:
Explanation: The formula calculates the interest earned by multiplying the principal amount by the annual interest rate and the time period in years.
Details: Calculating simple interest helps investors understand exactly how much they will earn from their CD investments, allowing for better financial planning and comparison between different investment options.
Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive numbers.
Q1: What is the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest.
Q2: Are CDs typically calculated with simple or compound interest?
A: Most modern CDs use compound interest, but some short-term or specific CD products may use simple interest calculation.
Q3: How do I convert percentage rate to decimal?
A: Divide the percentage by 100. For example, 5% becomes 0.05, 3.25% becomes 0.0325.
Q4: Can I use this for partial years?
A: Yes, you can enter fractional years. For example, 6 months would be 0.5 years, 90 days would be approximately 0.2466 years.
Q5: What factors affect CD interest rates?
A: CD rates are influenced by federal funds rate, term length, deposit amount, and the financial institution's policies.