| Certificate of Deposit Intrest rate. |
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gmoney30
First Time Poster
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| Certificate of Deposit Intrest rate. |
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I have been thinking about opening a 6 month CD with my bank (citi) It says that it has a 5 % APY. What I want to know is do I get 5 % of the money I put in every month? Or, is this 5 percent split over a 6 month period. (e.g. I get an intrest rate which adds up to a combined 5% amount over the 6 month period, or do I get 5% of my money back every month that the CD is active. I'm sorry if my question is hard to understand because of the wording I put it in, but I am a banking n00b
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Wed Sep 26, 2007 12:38 am |
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pf101
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Location: Portland, OR
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| Re: Certificate of Deposit Intrest rate. |
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quote:
Originally posted by gmoney30
I have been thinking about opening a 6 month CD with my bank (citi) It says that it has a 5 % APY. What I want to know is do I get 5 % of the money I put in every month? Or, is this 5 percent split over a 6 month period. (e.g. I get an intrest rate which adds up to a combined 5% amount over the 6 month period, or do I get 5% of my money back every month that the CD is active. I'm sorry if my question is hard to understand because of the wording I put it in, but I am a banking n00b
APY = ANNUAL Percentage Yield which means you get 5%/year or approx 2.5% total over 6 months. So, if you put in $1000, at the end of 6 months you'll have approximately $1025.
Frankly, you can get better rates from a liquid savings account so I don't see a purpose in locking your money into a CD for that rate.
Personal Finance 101
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Wed Sep 26, 2007 12:50 am |
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supercleanrick
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Most CDs are compounded, with the 5% being the annual rate. So the first month, you get 1/12th of 5%, or .42% added back into the account. The next month, you get .42% of the original amount plus the previous month's interest, and so on each month. You make interest on your interest.
My example uses monthly compounding, but you may have daily compounding, with monthly payments of the interest. In your case, you'll get a little less than my example, because they've quoted you an annual percentage rate, which takes this compounding into account.
You should also be aware that if you close the CD before the 6 months is over, you'll loose some or all of the interest. The banking phrase for this is 'Penalties may apply for early withdrawl.'
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Wed Sep 26, 2007 4:02 pm |
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efflandt
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But the OP said APY which is the annual rate after compounding, regardless of how it is compounded. So a 6 month CD with 5% APY would pay 2.5% over the 6 month period (maybe even not until the end). However, if you renew it for another 6 months at same 5% APY, you would earn interest on the interest from the 1st 6 months, which would be more than a 1 yr CD at 5% APY.
APR is an annual percentage rate that compounds each period (and the period can vary). For example 5% APR compounded daily would be a higher return than 5% APY, because each day would pay 5/365% interest on the interest paid through the day before. APR that compound monthly would pay about 5/12% per month (depended whether it considers the size of different months), which would net somewhere between a longer APY and daily compounded APR.
Banks like to use APY because it "looks" like you are getting a little better rate than the APR that compounds to it.
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Thu Sep 27, 2007 12:08 am |
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Fred42
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The interest of savings account are basically nothing today so if you can get 5% on a CD then I would go ahead and start it now cause it doesn't look like you will get any better percentage on your investment unless you put it into a more volatile investment.
[deleted]
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Fri Oct 12, 2007 10:46 pm |
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