Calculate the return on a Certificate of Deposit (CD) — enter your deposit amount, APY and term length to see interest earned and final balance at maturity.
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A Certificate of Deposit is a savings product offered by banks and credit unions that holds a fixed amount of money for a fixed period (term) in exchange for a guaranteed interest rate. CDs typically offer higher rates than regular savings accounts in exchange for committing to leave the money untouched until maturity. They are FDIC-insured in the US up to £250,000.
APR (Annual Percentage Rate) is the simple interest rate before compounding. APY (Annual Percentage Yield) accounts for compounding and represents the actual annual return. A CD with 5% APR compounded monthly has an APY of 5.12%. Always compare CDs using APY to find the true best rate, as more frequent compounding means higher actual returns.
Early withdrawal from a CD incurs a penalty — typically 3-6 months of interest for short-term CDs and up to 12-18 months of interest for longer terms. Some no-penalty CDs (also called liquid CDs) allow early withdrawal without fees but offer lower rates. Always check the penalty terms before opening a CD, especially if there is any chance you may need the funds.
A CD ladder involves splitting your investment across multiple CDs with different maturity dates — for example, 5 CDs each maturing 1 year apart. As each CD matures, you reinvest in a new long-term CD. This strategy balances higher long-term rates with regular liquidity, and ensures you can take advantage of rising rates without locking all your money at once.
CDs typically offer higher interest rates than savings accounts in exchange for locking up your money for the term. In the UK (2024-2025), easy-access savings pay 4-5% while 1-2 year fixed-term bonds (equivalent to CDs) pay 5-5.5%. The yield difference is the premium for accepting illiquidity. If you do not need immediate access, CDs/fixed bonds usually offer better returns.
CDs can be a good investment if the rate exceeds inflation, preserving purchasing power while eliminating risk. However, if inflation is higher than the CD rate (as during 2021-2022), you lose purchasing power. CDs are best suited as a safe, predictable component of a diversified strategy — not as a primary inflation hedge, for which inflation-linked bonds (TIPS in the US, Index-Linked Gilts in the UK) are better suited.
A brokered CD is purchased through a brokerage firm rather than directly from a bank. They can be bought and sold on secondary markets (unlike bank CDs), sometimes offer higher rates due to competition, and allow access to CDs from multiple banks through one account. The trade-off is that secondary market prices fluctuate with interest rates, so selling before maturity may result in a loss.
In the US, CD interest is taxed as ordinary income in the year it is earned (even if not yet paid out for multi-year CDs), reported on Form 1099-INT. In the UK, savings interest is taxed via self-assessment above the Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate). Using a Cash ISA eliminates tax on savings interest entirely.
