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- 1). Find the simple interest rate for the CD. This is the percentage of interest the CD would earn in one year without compounding (calculating and adding the interest earned to the balance of the CD at intervals during the year). The simple interest rate is stated in the terms and conditions of the CD. You also need to look to see how often interest is compounded.
- 2). Determine the periodic interest rate. This is the percentage interest that is added to the balance of the CD each time interest is compounded. Most CDs are compounded on a daily or monthly basis. The periodic interest rate is calculated by dividing the simple interest rate by the number of times interest is compounded for one year (12 times for monthly compounding and 365 for daily compounding). For example, if the CD pays a simple interest rate of 4.80 percent, divide this by 12 to get the monthly periodic rate of 0.4 percent (decimal equivalent 0.004).
- 3). Calculate the annual percentage yield on a 6 month CD (or one with any other maturity) using the equation Y = (1 + P)^N - 1. P is periodic interest rate expressed as a decimal, not as a percentage. N is the number of times the interest is compounded in one year. Y is the annual yield. You will need to convert Y to percentage yield by multiplying by 100. For the example in Step 2, the equation would be (1 + 0.004)^12) - 1 = 0.0491. Multiply by 100 to find the annual percentage yield of 4.91 percent.
- 4). Find your actual percentage yield for six months on a CD by using the same equation. The only thing you change is to divide the number of compounding intervals (N) in half. For the example above, this means N is equal to 6 instead of 12. Your six month percentage yield works out to 2.42 percent. You can multiply this figure expressed by a decimal (0.0242) by the principal of the CD to find the dollar amount the CD will earn in six months. For this example, a $10,000 CD will earn $242.
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