How Do Certificate of Deposit Interest Rates Work?

A CD, or certificate of deposit, is an investment that provides a relatively safe way for you to receive a fixed rate of interest over a specific period of time. CDs pay you interest on your deposited funds in a similar fashion to a savings account. However, a CD rate of return is typically higher than that of a savings account. CD rates are generally higher than either savings or checking account rates because you need to keep your funds deposited for a set period of time. Otherwise, if you withdraw your funds prior to the CDs maturity date, you will face a CD penalty.

Proceeds From CD Interest

A fixed rate CD will pay you interest on a regular basis. You can choose to receive the interest via check or automatic deposit. Or, you can decide to reinvest it. If you choose the option of reinvesting the interest, it will begin to compound and your account will grow faster.

How to Compare Certificate of Deposit Rates

When performing a CD interest rate comparison, credit union CD rates are typically somewhat higher than bank CD interest rates. This is because credit unions are non-profit organizations and they pass along their returns to their depositors, or members, whereas most banks must provide return to their shareholders.

Certificate of Deposit Interest Rates Relative to Inflation

Inflation can affect CD interest rates in a couple of ways. If the rate of inflation is low in comparison to the CD rate you are earning, then you are getting more value for your money. However, if the inflation rate is close to your current CD rates, then you are actually gaining less purchasing power.

Changes in interest rates actually reflect the changing expectations about inflation. Savings account interest rates adjust quickly, and rates on CDs follow when older CDs reach maturity and new CDs are issued into the market.

What is a Certificate of Deposit APY?

APY, or annual percentage yield, is the interest rate that you are paid on a time deposit account such as a CD. Unlike the set fixed interest rate, APY represents the actual amount of interest that you are paid over time, taking into account compounding of interest. For example, if the interest rate on your $10,000 one year CD is 2.0%, you would expect to earn $200 in interest over the one year time period. However, if that 2.0% interest is compounded quarterly, then the APY would be higher than 2.0%. This amount is the annual percentage yield. This can also be referred to as the certificate of deposit yield.

Read More:

  • Best CD Rates – find the best CD interest rates for your investment
  • CD laddering: how to structure the maturities of certificates of deposit to increase CD yield and ensure that you have access to funds when you need them.
  • CD Rate Calculator:  how to calculate the interest return on CDs.
  • CD Penalties:  potential CD penalties that any investor needs to watch out for.
  • CD Investor Facts: overview of key facts that any investor needs to understand before making a CD investment.