How the result is calculated
A certificate of deposit in the United States, a fixed deposit in India or Sri Lanka and a fixed-term bond in Britain are the same product: you lend the bank a sum for a set term at a rate fixed on day one. What differs between them is what happens to the interest, and what happens if you want the money back early.
If the interest stays in the deposit, it is credited at regular intervals, daily, monthly or quarterly, and each credit earns interest from then on. That is compounding, and the value at maturity follows from the quoted rate, the number of credits a year and the term.
VP × (1 + r ÷ m)m × t
- P
- the amount deposited
- r
- the quoted annual rate as a decimal
- m
- the number of times a year interest is credited
- t
- the term in years: months ÷ 12
If the interest is paid out instead, each payment is simple interest on the original deposit: the yearly interest P × r divided by the number of payouts a year. Because the money leaves the deposit, nothing compounds, and the deposit itself comes back unchanged at maturity.
The calculator states the result as an annual percentage yield, the figure US banks must disclose under Regulation DD: the yearly rate that would produce the same growth, (1 + interest ÷ deposit)^(1 ÷ years) − 1.
Early withdrawal comes in two common forms. American banks usually forfeit a number of days' or months' simple interest on the deposit; federal rules set a floor of seven days' interest for withdrawals within six days of deposit and no ceiling. Indian banks usually pay interest for the time actually held at a rate reduced by a penalty, often around one percentage point. The calculator offers both.
Worked example
| Item | Amount | How it is obtained |
|---|---|---|
| Rate per credit | 0.010959% | 4% ÷ 365 |
| Credits over the term | 365 | 365 × 1 year |
| Growth factor | 1.0408085 | 1.00010959365 |
| Value at maturity | $10,408.08 | 10,000 × 1.0408085 |
| APY | 4.08% | 408.08 ÷ 10,000 over one year |
| Item | Amount | How it is obtained |
|---|---|---|
| Rate per quarter | 1.75% | 7% ÷ 4 |
| Quarters | 8 | 4 × 2 years |
| Value at maturity | 1,14,888.18 | 1,00,000 × 1.01758 |
| Same deposit with quarterly payouts | 14,000.00 | 8 payments of 1,750 |
| What compounding adds | 888.18 | 14,888.18 − 14,000.00 |
| Item | Amount | How it is obtained |
|---|---|---|
| Interest earned in 6 months | $202.00 | 10,000 × (1.00010959182.5 − 1) |
| Penalty | $98.63 | 10,000 × 4% × 90 ÷ 365 |
| Received | $10,103.37 | 10,000 + 202.00 − 98.63 |
Close after a month with a 180-day penalty and the penalty exceeds the interest, so you get back less than you put in.
Reading the result
For a cumulative deposit the headline is the value at maturity, with the interest beneath it. For a payout deposit it is the amount you receive each month, quarter or year, with the total and the return of your deposit beneath. The tiles give the total interest, the APY, and either the average interest a month or, if you modelled an early withdrawal, what you would receive and the penalty.
The month-by-month table shows the interest each month and, for a payout deposit, what is paid to you and when.
What changes the result
The rate and the term matter most. Compounding matters less than it seems: at 4%, daily rather than yearly compounding adds 0.08 of a point a year. Choosing a payout over a cumulative deposit costs more, because the paid-out interest stops earning.
The penalty can change a deposit from a good choice to a poor one if there is any chance you will need the money early. A 365-day penalty on a one-year CD closed after six months takes more than everything it has earned. Read the penalty terms before you choose the term.
What is not included
Tax on interest is not deducted, and in India tax deducted at source applies above an annual threshold of interest. The rate for a deposit renewed at maturity is unknown and not modelled. When an Indian deposit is broken, banks often apply the penalty to the rate they offered for the shorter period held, not to your contracted rate; enter a larger reduction to allow for that. Deposit insurance limits, which decide how much of a large deposit is protected if the bank fails, are not considered.
Using the result
Compare deposits on their APY, not their quoted rate, and compare the penalty terms as carefully as the rate. If you might need part of the money early, splitting it across deposits of different terms, a ladder, limits what any one withdrawal costs. And if you want an income, check how much less a payout deposit earns than a cumulative one before choosing it.