CD Interest Rate Inquiry

[Etheredge]

"Remember that rates on CD's are always expressed in APR (Annual percentage yield.) In other words, this is the interest rate that would be applied to your money on an annual basis. The term on the CD is 6 months, so your getting clser to a 5% rate on your money. Not exactly 5%, due to the algebra involved, and I can't remeber the exact formula off the top of my head, but it's somewhere around 5%."

Im confused about this... I thought the interest rate of a cd was compounded monthly?

I hardly know anything when it comes to investing so any help would be greatly appreciated.

[sweeps]

APY includes the effect of compounding, but your money must be in the account for a full year. On a 6 month 5% APY CD, you'll earn a little less than 5%.

[Aleta]

APR is the amount compounded daily and depending upon when the interested is deposited into your account will determine how much you receive. Many are compounded daily and put in monthly. APR is the interest rate and the APY is for one year. I personally like the APR rather than the APY.

[Etheredge]

Alright so if i put 5,000 into a CD with a 5% APR.

What im confused about is will it earn money monthly?

My thoughts was that it did and it would be a 250$ increase each month?

Or am i completely lost....

[skydivingchic]

How often interest is credited depends on the terms of the CD. For instance, lets say the advertised rate is 5% Annual Percentage RATE. Interest is credited monthly for this CD. You put in $1000.

Start - $1000
1 month - $1004.17
2 months - $1008.35
3 months - $1012.55
4 months - $1016.77
5 months - $1021.01
6 months - $1025.26
7 months - $1029.53
8 months - $1033.82
9 months - $1038.18
10 months - $1042.46
11 months - $1046.80
12 months - $1051.16

If you just multiply $1000 by the 5% APR, you end up with $1050. They APY quoted takes into account the compounding - in this case the APY would be 5.11%. So if you look at APYs you are comparing apples to apples. It doesn't matter if one CD only compounds yearly and the another compounds monthly - the one with the higher APY will earn you more. If you look at interest rates for CDs or savings accounts, the APY will usually be slightly higher than the APR because you are earning interest on the interest if your account is credited more often than annually.