A certificate of deposit (CD) is one of the safest places to park your cash, and typically offers a higher interest rate than a regular savings account. Most CDs earn compound interest, which means you earn interest on your initial investment and on previously earned interest. A CD can compound, or calculate interest, daily, monthly or at some other interval. With continuous compounding -- the most frequent compounding available -- you earn interest 24/7. With all else being equal, you earn more interest on a CD that compounds continuously than on one that compounds at a less-frequent interval.

## Step 1

Multiply the CD’s annual interest rate as a decimal by the number of years until it matures. For example, assume you want to know how much interest you will earn on a two-year $5,000 CD that pays 7 percent annual interest compounded at a continuous rate. Multiply 2 by 0.07 to get 0.14.

## Step 2

Raise Euler's number, “e,” to the power of your Step 1 result. Euler's number equals approximately 2.7182818. You can substitute this number for “e” if your calculator lacks an “e” function. In this example, raise “e” to the 0.14 power to get 1.150274.

## Step 3

Multiply your result by your initial investment in the CD to determine its value when it matures. In this example, multiply $5,000 by 1.150274 to get $5,751.37. This means your CD will grow to $5,751.37 at the end of two years after earning continuously compounded interest.

## Step 4

Subtract your initial investment from your result to calculate the amount of interest earned. Concluding the example, subtract $5,000 from $5,751.37 to get $751.37 in interest earned from continuous compounding.

References

Tips

- Although continuous compounding earns the most interest compared to other compounding intervals, daily compounding comes in at a close second. The difference between interest earned on a continuously compounded CD and that on a daily compounded CD is negligible.

Warnings

- If you withdraw money from your CD before its maturity, you’ll reduce the effects of continuous compounding and might be responsible for early-withdrawal penalties.