A certificate of deposit, or CD, is a type of savings account offered by banks and other financial institutions. With a CD, you deposit your funds for a fixed term. Once your CD’s term ends — also known as “maturing”— you can withdraw your funds along with the interest earned, or you can choose to roll over your funds into another CD to continue saving. You can also withdraw your funds before a CD’s term ends, but doing so may incur an early withdrawal penalty.
CD interest is typically compounded on a fixed schedule — monthly, daily, quarterly or yearly. The interest continues to compound for the duration of your CD’s term.
Let’s take a closer look at how CD rates are compounded.
What is compounding interest?
Compound interest occurs when you earn interest on your initial deposit and on the interest you earn along the way. For example, if you deposited $2,000 in a savings account and earned $2 in interest at the end of the monthly closing period, your total balance would now be $2,002. For the next closing period, the interest rate on your account will be applied to your new balance of $2,002 rather than your original principal balance of $2,000.
Does CD interest compound?
CD rates are usually compounded monthly or daily. The more frequently CD rates are compounded, the more compounding interest you can earn.
