Questions about CD's and APY's

mattg1981

Senior member
Jun 19, 2003
957
0
76
1) I have been looking into CD's to do some short term investing, and all CD's rates that I see are listed as APY's, but I have a question about APY.

APY = Annual percentage yield .. thus yearly percentage yield

If I put 10k in a 1 month CD at say 5%, for maths sake ... at the end of the 30 days, would I get 5% interest on the 10k .. or would I get 5%/12.

I guess to sum it up, because APY = yearly percentage yield, is that 5% what I would have earned if I left it in the entire year, or is it just the term they use to say you will earn 5% on the CD.

2) And that leads to my second question, if it is just the term they use to say you will get 5% interest .. whats the point of long term CD's ... I am looking at this banks website and the difference between a 30 day CD and a 5 year CD wouldnt add up. 30 day CD = 4.50% and a 5 year = 5.45% .... the payouts on the 30 day CD, (60 payouts over the course of 5 years) would way outgain the interest you get on the single payout 5 year, thats why I ask question number one, because it just doesnt make sense why they would do this.

Maybe I am just financially dumb and really have no idea how this works, so if I am way off .. go easy on me
 

Ika

Lifer
Mar 22, 2006
14,267
3
81
I'm not sure about this because I'm a financial moron but it might have something to do with the way they are compounded. Rates of growth equations and whatnot... doh!
 

Dacalo

Diamond Member
Mar 31, 2000
8,780
3
76
Why is my APR (3.92%) less than the stated Rate (4% APY)?
What's the difference between APY (annual percentage yield) and APR (annual percentage rate)?
APR is the annual rate of interest without taking into account the compounding of interest within that year.
APY does take into account the effects of intra-year compounding.

Why is the "APY Earned" on my statement not the advertised APY?
The APY Earned ("APY-E") is not the same as the APY. They are calculated according to different regulations. Since interest is compounded daily, the APY-E will be affected by the fact that your account balance changed significantly during the month. APY-E also reflects any interest rate changes during the month.
 

dullard

Elite Member
May 21, 2001
25,055
3,408
126
The answer to #1 is that both are wrong. However, 5%/12 is close to the correct answer.

#2: 5.45% > 4.50%. Thus the 5 year CD will earn more interest (assuming interest rates don't change, however they will).

 

drnickriviera

Platinum Member
Jan 30, 2001
2,415
200
116
Did you really think you could earn 5% a month, meaning 60% in 1 year. Talk about inflation :)

If you are talking short term, why bother locking in your money in a CD. Just stick it in hsbc or emigrant and earn a higher rate with no liquidity issues