Are you trying to figure out the value of a certificate of deposit (CD)? CD market value isn't static just because your interest rate is locked in. That means you'll need to take some steps beyond simply subtracting any withdrawal penalties from what you've accumulated to get your current in-pocket value.
What you're really figuring out when determining CD market value is the total that someone would pay for your CD right now based on market factors. Let's talk about the easiest way to do this if you're thinking about withdrawing CD money in 2020 or 2021.
Read More: What Is a Certificate of Deposit (CD)?
How Does a CD Work?
A CD is a financial product that you put money into for a specific duration. CDs have life spans that typically range from three months to six years. Be prepared to pay penalties if you decide to pull your money out before your CD's maturity date.
Read More: What Does CD Stand for in Banking?
CD Value All Comes Down to Interest Rates
When determining the value of your CD, take a glance at your interest rate. When rates go up from the rate you've locked in for your CD, your CD will lose value, and when rates go down from the rate you've locked in for your CD, your CD will gain value. It all has to do with investors seeking options with higher rates of return. You're in a position to get a higher rate locked in if you're able and willing to make a larger deposit.
When determining CD value, your goal is to find the full amount that your CD will be worth at the end of your chosen term. You can use the mathematical formula for adding compound interest by plugging in your own numbers: A = P(1 + r/n)^nt. Here's a breakdown of what the different variables mean:
- "A" is the full value of your CD at the end of your term when you factor in your initial amount and interest.
- "P" is your starting amount (principal).
- "r" is the annual interest rate in decimals.
- "n" is the number of times your interest compounds every year. You may have a daily compounding rate attached to your CD.
- "t" is the number of years until your CD hits maturity.
If that seems too complex, you can find a CD interest calculator tool online that will allow you to get your value by simply plugging in the variables above. You may need to check with your bank regarding just how frequently your interest compounds. For most CD owners, that number is going to be 365.
Good to Know for Your 2020 Taxes
The interest you earn on your CD is considered taxable income during the year that it's earned. That applies even if you don't withdraw your money. If you have a CD, keep an eye out for a 1099-INT (interest income) statement from the bank or credit union you sourced your CD from that will show how much interest was earned for the year.
Read More: Pros & Cons of Bank CDs
- When interest rates drop in the market, instead of dividing the face value by the adjusted par value, use the original par value to determine the premium. With the example above, $1,050 divided by $1,030 to equal $1019.41 as the present market value.
- When you buy a brokered CD on the primary market (offered directly from the bank at issue), the broker should not charge you a fee as the broker gets paid by the bank. When you buy or sell a brokered CD on the secondary market (after issue in the middle of the term) the broker can charge a fee. Be sure to ask what those are to calculate how that affects your market value.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.