When investing into a CD (Certificate of Deposit), it may start to get confusing when there is a lot more involved other than a simple interest rate figure. As you do research, you will find there is more than one type of CD.

Take for example; a CD that has less than one hundred thousand dollars invested in it is considered a “small” CD. A CD that has more than one hundred thousand dollars invested in it is called a “jumbo” CD.

Every CD has something in common though. They all will provide an interest rate, an APY rate, minimum balance, and length. The bank provides all these. The following list will help you understand the meaning of each of these terms.

Rate: This is the simple interest rate. This will be the annual rate of return without the effect of compounding interest. The APY rate and the actual interest rate will be different. This is because you don’t actually earn the APY rate on the original principal. You will earn the compounded interest rate, which is your rate on the balance.

Let’s use this example to understand –

• Let’s say you invested into a one-year CD with $1,000 that pays you 5% semi-annually (at the end of six months)
• At the end of the six months, you will receive $25. ($1,000 x 5% x .5 years)
• Now, this $25 will be invested back into your CD. Your account balance will now read $1,025. This new balance is now gaining interest of it’s own.
• If you take that $25 and multiply it by 5% and multiply it again by the 6 months (.5 years), you will have 0.625 cents. This is where the APY will come in. The APY yield is actually 5.06% because of this interest being re-invested, which in turn raises the rate at the end of the year.

Compounding Method: Each bank will report its interest on the following levels.

Annually – Your interest is compounded yearly.

Semi-Annually – Your interest is compounded semi-annually.

Quarterly – Your interest is compounded every quarter. Just think of it as the beginning of every season.

Monthly – Your interest is compounded at the end of each month.

Daily – Your interest is compounded at the end of each day.

APY: We touched on this one a little bit as mentioned above. The APY best known, as “Annual Percentage Yield” is the yield you earn on a deposit over a year. This is the most important part of a CD when looking to invest in one.

For example, if you invest $1,000 at a 5.00% APY rate for one year. At the end of the one year, you will have a $1,050 balance.

Minimum Balance: Most banks will note the minimum balance on every CD. This term is self-explanatory. Most of the times banks will offer higher rates for a CD with a higher minimum balance. As you may find from your research, minimum balances vary from $1 and beyond.

These terms are just the beginning when investing to a CD. We will just call them basic. As time goes on, you find that there are so many other terms involved. For beginners, these are the terms you will need to know when looking to invest into a CD.