Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.
Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.
Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.
Gary Houlder/Getty Images
Ready to begin building up a healthy amount of savings? First, it’s important to understand the very cool concept of compound interest, and to do that you’ll need to know the difference between an interest rate and yield.
Rate is the nominal, or stated, interest rate on the investment. If you have a CD with a stated interest rate of 5%, the interest is calculated by multiplying the amount invested by 5% and by the fraction of a year the money is invested.
Let’s say interest is paid annually. A $10,000 investment will earn $500 in interest per year ($10,000 x 5% x 1 year = $500).
Yield represents the interest that will be earned not only on your investment amount but also on your interest as it builds. The interest paid on the interest you’ve already accumulated is called compound interest.
When an investment pays interest annually, its rate and its yield are the same.
But when interest is paid more frequently, the yield rises. That’s because the interest payment is credited to the CD more quickly and it starts earning interest along with the invested principal.
RATE SEARCH: Looking for high yield? Compare checking account rates today on Bankrate.
Annual vs. compounding interest
Annual interest
Let’s say a $10,000 CD investment earns 5% interest, paid annually: After one year, you would have:
$10,000 x 5% x one year = $500 interest
Total interest: $500
Annual yield
If that same CD pays interest twice a year, after 6 months you would have:
$10,000 x 5% x 0.5 years = $250 interest
During the second half of the year, you also would earn:
$10,000 x 5% x 0.5 years = $250 interest
But the $250 in interest earned during the first half would start earning interest, too:
$250 x 5% x 0.5 years = $6.25 interest
Total interest: $506.25
The rate and yield on the first CD is 5%. The rate on the second CD is 5%, but its yield is 5.06%.
To get that yield you must reinvest the interest. That’s what compound interest is all about.
Bankrate.com has several calculators that can help you achieve your savings goals.
RATE SEARCH: Compare savings rates today at Bankrate.
Share