The formula to calculate the Final Value (FV) is:
\[ FV = IV \cdot (1 + \frac{r}{m})^{(t \cdot m)} \]
Where:
A CD (certificate of deposit) return refers to the money you earn from investing in a certificate of deposit. When you deposit your money into a CD, you agree to keep it there for a specific period, known as the term. In return for locking your money away, the bank or financial institution promises to pay you a fixed interest rate on your investment.
The CD return is the interest you receive on top of the initial amount you invested. It is usually expressed as an annual percentage rate (APR) or annual percentage yield (APY). The rate is predetermined and remains fixed throughout the term of the CD, regardless of any fluctuations in the market.
The longer the term of the CD, the higher the potential return, as banks often offer higher interest rates for longer commitments. Different banks may offer different rates, so it's important to shop around and compare offers to get the best return on your investment.
CD returns can be an attractive option for individuals seeking a low-risk investment. Since the interest rate is fixed, you know exactly how much you will earn at the end of the term. This predictability makes it easier to plan for financial goals or upcoming expenses.
It's important to note that CD returns are typically lower compared to other investment options, such as stocks or mutual funds. This is because CDs are considered safer investments, and the returns reflect this lower level of risk. Additionally, withdrawing your money before the CD matures may result in penalties, impacting your overall return.
Let's assume the following values:
Using the formula to calculate the Final Value (FV):
\[ FV = IV \cdot (1 + \frac{r}{m})^{(t \cdot m)} = 1000 \cdot (1 + \frac{0.05}{4})^{(5 \cdot 4)} = 1000 \cdot (1.0125)^{20} = 1282 \]
The Final Value (FV) is $1,282.