What is the difference between the dividend rates and APY for a certificate of deposit?
I'm having trouble understanding CD rates on my bank's webpage.
For a 1 year CD, they have the following rates listed:
Dividend rate: 5.40%
Monthly APY: 5.54%
Quarterly APY: 5.51%
What is the difference between these rates? To make the math easy, say I had $100 invested in this CD. How much interest would I earn on that $100 in 1 month, in 3 months, and in 1 year? And, what formulas did you use to come up with these numbers?
Both of the answers are pretty good -- but neither addressed the hypothetical situation above.
If I invested $100 (to keep the math easy) at these rates, would I have $105.40 in a year if i did not reinvest? Or would I be paid $5.40 every month?
- 1 decade agoFavorite Answer
Dividend rates are established by the Board of Directors and are subject to change, based on current economic conditions and company annual earnings.
(APY) Annual Percentage Yield assumes reinvestment of principal and dividends. APY is calculated by compounding interest, this is interest which is added to the original principal. New interest is then calculated, not only on the principal, but also on the interest that has been added. The more frequently interest is compounded, the faster the principal grows. Yearly compounded interest is considered the norm unless it is specified to be otherwise.
A CD in the world of personal finance is not a compact disc but a certificate of deposit. You buy a CD from a bank or savings & loan for some amount of money, and the bank promises to pay you a fixed interest rate on that money for a fixed term. For example, you might buy a 30-month CD paying 3% in the amount of $5,000. A bank may have a minimum amount for issuing CDs like $1,000, but there is usually no requirement to buy a CD with an even amount. Interest earned by a CD may be paid monthly, quarterly, annually, or when the CD matures. Interest paid during the CD's term is paid by check or deposited to another account; it is never added to the amount of the CD (like in a savings account), because the CD amount is fixed.
After you have purchased a CD, you can always redeem it before the stated maturity date. However, if you cash out early, the bank will impose a penalty in the amount of 3 or 6-months of interest payments, depending on the term. This "penalty for early withdrawal" is due whether any interest was paid or not.
As the name implies, a CD is usually a piece of paper (the certificate) that states the interest rate and term (actually the maturity date). Because CDs are issued by banks, a CD for less than $100,000 is insured by the government (probably the FDIC program), so the investment is essentially risk-free.
Some CDs can be bought and sold much like a stock or bond. If you buy a CD through a brokerage house, you may be able to re-sell the CD through them to avoid paying an early withdrawal penalty. These CDs usually have significant minimum investment amounts (like $5,000) and require round numbers (like multiples of 1,000).
- Anonymous1 decade ago
The dividend rate is the actual rate the CD pays, if you take the interest out every month, you make 5.4%. Annual Percentage Yield is derived by taking the interest and reinvesting it. So if you take no interest and allow it to compound, you will earn more money. A CD that matures in one quarter may have an APY of 5.51%, but you only earn a quarter of that return, because you're not invested for the full year. Conversely, if you could renew at the same rate each quarter and take no interest, then you would receive the APY of 5.51%.
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- Anonymous3 years ago
Would like to know more about this too
- JoannaLv 44 years ago
Waiting on more answers before I share my view
- hopeLv 43 years ago
Was asking myself the same question