Calculating CD formulas help investors track their investments and savings.
Using algebra, an investor can determine how much he needs to deposit in the certificate of deposit (CD) to make a certain amount of money. This will help an investor plan his investments so he can reach an investment goal. In order to calculate this, the investor needs to know the interest rate on the CD, the length of the CD and the amount he wants at the end of the CD.
Instructions
1. Determine the interest rate per compounding period. For example, 6 percent per year on a CD that compounds monthly equals 6 percent divided by 12 months, which equals 0.005.
2. Add 1 to the interest rate per compounding period. In our example, 1 + 0.005 equals 1.005.
3. Raise the number calculated in Step 2 to the power of the number of times the CD will compound. In our example, if the investor gets a one year CD, then a one year CD will compound 12 times. Therefore, 1.005 ^ 12 equals 1.061677812.
4. Divide the total amount the person wants to have at the end of the CD by the number calculated in Step 3. In our example, if the investor wants $25,000 at the end of the CD, then $25,000 divided by 1.061677812 equals $23,547.63 as an initial deposit.
Tags: interest rate, calculated Step, compounding period, compounding period example, example investor
