can one of you financiers explain how this works and what i can expect to make if i put $5000 into a cd with these parameters:
term: 8 month
interest rate: 6.53%
APY (Annual Percentage Yield): 6.75%
interest compounded daily.
interest deposited monthly, quarterly, semi annually, annually, or ‘at term’ (i have to choose one).
deposit to my checking account or capitalized to the cd (also my choice).
thanks!
I believe you will make $225 in interest, but I don’t have any financial wizardry, so I just used math.
6.75% / year * 2/3 year * $5000 = $225
You don’t have to worry about the effect of the daily compounding because they’ve already provided the yield to you.
does it matter which of the interest depositing intervals i choose as well as the deposit location options?
i’m referring to this stuff:
interest deposited monthly, quarterly, semi annually, annually, or ‘at term’ (i have to choose one).
deposit to my checking account or capitalized to the cd (also my choice).
The formula for interest is fv=pv(1+i)**n
where
fv=future value
pv=present value
i=interest
n=number of periods
Just memorize this formula and use a calculator and you can figure this stuff out. And don’t use a financial calculator. It turns this stuff into a black box.
You have and interest rate of 6.53% compounded daily for 8 months. For some odd reason, in finance, 8 months means 240 days. Your daily interest rate is .0653/240 or .000272083. 1.000272083**240 is 1.067469738. So your yield is 6.7446. This bothers me because the bank said 6.75. They may be using a different number of days to represent 8 months and
you should clarify this. Or maybe they “rounded up”. Anyway, if my numbers are right, you will multiply your 5000
by the 1.067… which gives you 5337.348. So you will make 337.35.
Now you need to decide if you are after “growth” or “income”. With “growth” you have a pile of money that you don’t need for a while and you want a larger pile of money. In that case, just go for the “at term” capitalized into the cd. On the other hand, if the $5000 is your nestegg and you plan to live on the $42.16 a month, send it your checking account on a monthly basis.
A word of warning: I have never purchased a cd and I plan to keep it that way. My money is in equity mutual funds since I am going for very long-term growth. Since I have no experience with cd’s, I probably don’t know what I’m talking about.