How Do They Compute CD Interest Rates?

When deciphering rates becomes too much of a hassle, leave it to the professionals. Learn what determines the CD rates and long term yield effects.

Certificates of Deposit, or CD’s, are one of the safest investment vehicles offered. With the tight conservative nature of the product itself, one cannot expect to have a rate as high as would be seen with an IRA. There is a rate though that follows closely with inflation, that determines how much can be expected to accumulate in interest in the CD. If the CD accrues interest on top of the principal paid in then there is the chance that the yeild on the CD, over time, will be more than the interest rate.

How Are The Rates Calculated:

The main component in CD rate calculation is inflation. The reason that rates are so low as of the present is because the FED rates are barely approaching zero. The Fed rates determine the lending rates that banks can establish. So CD rates are going to be determined by each individual bank based on the amount that they can afford to payout in interest on the money that was lended. Credit Unions will have higher rates compared to regular banks, because they are under a different set of rules and regulations as far as lending. It also depends on the bank’s compounding policies too, as to what the rates will be. The rates may be initially lower but it is established that bank CD rates will go up the longer that you have the money invested.

How Is The Yield Calculated Compared to the Interest Rate:

The most important factor in CD yields is compounding. If the company you are invested with compounds quarterly then every three months you accumulate interest on top of the interest already earned. This is a nice advantage to have when CD rates are not as high, because the CD yield can be much higher than the CD rate. The longer you hold your investment in the CD the larger the yield at maturity, because of the extra compounding that takes place.

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3. A Guide To Finding The Highest CD Rates
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