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That CD, Though
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THE SCENARIO
I recently saw a billboard advertising a Certificate of Deposit (CD) at a local bank at an 'amazing' 1.75% rate. That got me curious as to what the best CD rate I could possibly get might be, so
I did some looking and found that if I wanted to tie my money up for 5 years, I could get 2.75%*. I suspect that a 2.75% return isn't going to be my path to fortune, but let's do the math and check it out.
One thing to know about CDs is that when you put your money in, you can't take it back out (without a penalty) for the length of the term. Basically, in return for giving you a higher interest rate than you'd get on a normal savings account, the bank gets to keep your money for longer, knowing you won't ask for it back for the duration.
The question: If I invested $10,000 in a Captial One 5-year CD at 2.75% interest, how much would I have at the end? Assume monthly compounding.
* Depending on when you visit the rate-shopping site, you may see different rates than I did.
THE SOLUTION
First things first, make sure the calculator is using 12 Payments per Year.
N: 60 (5 years is 60 months)
I/YR: 2.75 (The CD's rate is 2.75%)
PV: -10,000 (I'm investing $10,000 in the CD)
PMT: 0 (During the 5 years, I don't give the bank any more money, and they don't pay me, either)
FV: (This is what I'm trying to find)
By the end of the 5 years, my $10,000 initial investment will have grown to a whopping $11,472.21.
A clever marketer might note that you'll make 14.72% (the $1,472 in interest earned is 14.72% of the original $10,000 investment) on your money over the course of 5 years... but that's an
overall rate rather than an
annualized rate. In the end, the stated 2.75% interest rate on the CD doesn't even beat inflation, so if I've got money available to invest, I'm going to be looking for something far,
far better than this CD.
What do you think? Would you get into a CD like this one? Why or why not? Or do you have something you like investing in more? Let us know in the comments!
