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If the first thing that springs to mind when you hear the letters CD is a CD-ROM, you might have a lot of questions about what a certificate of deposit (CD) is, how they work, and how much money you could earn in interest. Rest assured: you’re in the right place!

Unlike a traditional savings account, you can’t easily add or remove money from a CD before the term is up. If you need to take money out before the CD term is up, you’ll typically have to pay a penalty. In exchange for that restricted access, CDs tend to offer higher rates than savings accounts, money market accounts, or interest-bearing checking accounts. It’s a tradeoff you’ll want to carefully consider.

If you already feel confident that CDs are the right savings tool for you and want to jump straight to calculating how much interest you could earn, check out our CD Interest Rate Calculator.

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CD Interest Calculator


It can be confusing understanding all of the abbreviations and terms used in banking. Our CD calculator includes helpful tips, but here are some more in-depth explanations to help you make sense of things.

Interest Rate

Annual Percentage Yield (APY)

  • APY is a calculation of how much money you end up with in your CD after a year. The APY is always higher than the interest rate because it includes compounding interest. More about Interest Rate and APY.

Certificate of Deposit (CD), Share Certificate, Term Certificate, or just Certificate

  • These are all common names for a type of savings product that pay a guaranteed rate of interest during a set term. Most of these offerings have a minimum deposit and offer rates based on the size of your deposit and how long you’re setting the money aside for.

CD term

  • A term is the length of time you agree to leave your money in the CD. Terms are most commonly shown in months, with rates typically increasing the longer you leave your money in the CD. Be sure you won’t need to access the funds during that time though since early withdrawals will often result in penalty fees.


  • Compounding interest is when you earn interest not just on the money you deposit into the CD, but also on the interest you’ve already earned. Making money on the money you just made: how cool is that? The frequency at which your interest is compounded can vary, and may make a big difference in how much you earn over time.

Interest rate

  • This number shows how much money you will earn as a percentage of the money in your account. If you have compounding interest, it will apply to your principal, or initial deposit, as well as to any interest you’ve earned.

How much interest can you earn with a CD?

Using a CD interest calculator or the formula below can help you easily figure out how much money you can earn with a CD. Since different banks offer different rates and CD term lengths, it’s always worth shopping around to find the best bang for your buck. At First Merchants, we’re proud to offer competitive rates and our always proactive customer service.

How CD interest is calculated

Simple interest is money earned on your initial deposit. Compounding interest is money you earn on the interest you’ve already earned as well. Most CDs use compounding interest.

Interest Rate vs. APY

The interest rate and Annual Percentage Yield (APY) are similar terms for subtly different calculations. Both are useful numbers to know, just be sure you are looking at the same value if you’re comparison shopping.

The interest rate determines what you will earn across the term of your CD. APY is the total amount you end up earning, which includes compounding interest. Said another way: Interest Rate is used to figure out how much interest you earn and APY is used to show how much you will have in the account, including interest.

Compound Interest

Now that we have our bases covered, let’s take a look at how interest compounds on a CD.

Let’s say you put $1,000 into a 12-month CD with an interest rate of 1.25%. If it compounded daily, that means your bank would calculate and add interest every day for a year.


  • $1,000.00
  • 12-month CD
  • 1.25% APR
  • Amount in CD at maturity: $1,012.58

The great thing about CDs is that the rate is fixed when you make your deposit and it can’t go down over the length of your term. Of course, that means it can’t go up either!

It can be hard to predict what interest rates will do, but CDs won’t lose money like can happen with higher risk investments like the stock market. That makes CDs a great option to increase your wealth if you are risk-averse.

What about savings accounts with really high rates? Sometimes savings account rates will seem better than CD rates, but be sure to read the fine print. It’s not uncommon for big savings rates to only apply for the first 30, 60, or 90 days your account is open and only if you keep a minimum dollar amount in the account. If the rate drops, you might well end up making less in interest than if you had put your money into a CD with a steady, though “lower”, rate.

That’s why it’s important to compare all of your savings options, and put your money into the right account for you.

CD Ladders

One smart way to make the most of CD rates is to set up what’s called a CD ladder. A CD ladder helps you access the higher interest rates of a long-term CDs without having to lock all of your funds away for years at a time.

When you set up a CD ladder, you open multiple CD accounts of different term lengths. You can distribute your money however you like, but here’s an example to get you thinking:

Let’s say you have $10,000 you want to put into CDs.

The best rate when you are planning your ladder is in the 60-month (or 5 year) term. You’d make the most money if you put all $10,000 into that 60-month CD, but then you wouldn’t have access to that money for quite a while.

With a CD ladder, you can split the $10,000 across five CDs with term lengths of one year, two years, three years, four years, and five years. That way, you have a CD maturing each year and you can easily adapt to what is going on in your life. If you need cash, you won’t have as long to wait to access it. If you find it easy to get by without it, you can roll the money into another CD at the maturity date and keep saving and earning.


$10,0005 years


$2,0001 year
$2,0002 years
$2,0003 years
$2,0004 years
$2,0005 years

A true CD ladder would see you renew your money at the end of the term for the highest rate, so the ladder can keep going indefinitely. Other options include depositing your initial deposit amount again but pocketing the interest, or depositing the interest and pocketing the original deposit. It’s all up to you!

Explore your savings options with the First Merchants team

Want help figuring out the best short- and long-term savings options for you? Get in touch and our helpful team will be happy to walk through it together.

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Frequently Asked Questions

What is a certificate of deposit?

A certificate of deposit or CD is an account that earns interest, helping you earn money. CDs are FDIC insured when you open them with FDIC member banks. With a CD, you’ll have a guaranteed interest rate that locks in when you open the account and deposit your money. Your money will be held in the account for a set length of time, often listed in months. CD term lengths can vary from short-term CDs at 3 months, to longer ones at 60 months (that’s 5 years).

During the CD term, your money likely won’t be accessible without an early withdrawal penalty, so be sure you have other savings on hand for emergencies to avoid unnecessary fees. CDs can be a good option in addition to savings accounts and checking accounts that pay interest, as well as longer-term savings like retirement funds and pensions.

Does a CD have a minimum deposit?

Most often, yes. The minimum amount you need to open a CD account will vary by bank and sometimes by term length.

Can you lose money in a CD?

No. That’s the great thing about CDs: they have a rate that locks in when you open the account and deposit your money. Even if you choose a longer-term CD for 5 years, the rate won’t change, so you’ll know exactly how much money you’ll earn over that time period.

Note that if you need to take money out of your CD before the end of its term, you may be charged penalties.

Are CDs FDIC insured?

Yes, if the CD is at an FDIC member bank or credit union. The Federal Deposit Insurance Corporation (FDIC) guarantees customer deposits up to $250,000 per person. That means your money would be secure if anything were to happen to your bank. First Merchants is an FDIC member.

What happens if you withdraw a CD early?

If you need to take money out of your CD before the maturity date, you’ll typically owe a penalty fee. Plus, you’ll lose out on potential interest you would have earned. If you’re worried about needing to access money that is in a CD, it might be worth considering traditional savings accounts, CD ladders, shorter length CDs, or a combination of all of the above.

When do CD rates change?

CD interest rates tend to keep pace with typical interest rate changes. That means if the Federal Reserve increases or decreases its benchmark rate, CD rates will rise or fall accordingly.

Generally speaking, they change a few times a year. Rates can change more often when there are periods of strong economic growth or high inflation.

CDs might keep up with the rate of inflation, but remember that any interest earned on your CD will be taxable as income.