Anyone able to answer this investment scenario?

Question

Can someone tell me the situation for this bank CD investment?

My local credit union has an offer for CD investments. I'm a novice, so I'm trying to figure out what these statements mean.

1st CD offer:

12 months Interest rate of 2.95% APY=2.9828% Minimum $500

Okay, I know you have to leave the $500 in the account for the complete 12 months. That's how this works for me and the credit union to make money. However, how does the APY effect the $500 deposit? Do I make my money off the interest rate or the APY? Basically, how much money would I get if I held to my side of the 12 month/500 dollar agreement?

Also, it seems to me, that bank CDs are far more useful in relatively short-term use rather than 5 year depostis. Am I wrong?

Answer 1

Federal law requires that financial institutions state what the interest rate is in lay terms.  The 2.9828% is the rate you can use to figure simple interest rate to see how much interest you would earn over the life of the CD.  ($500*.029828 = $14.91)  If you use the long interest formula you would get $14.95.  Not much of a difference, but most people cannot figure out interst using the long formula.  FV=PV*(1+k/interest per period)nth where nth = number of compounding periods * number of years as an exponent.  If compounding interest was once every 6 months you would earn an interest of $14.93; not very material on $500.  

Answer 2

Short term Cd's are a good way to make some income especially when the market goes up one day and down the next. I would look around for a better rate for a 3-6 month term. Check your local papers or WWW.Bankratemonitor.com . Short term Cd's are best if you expect rates are going up (they are).

You need to ask the Bank or Credit Union how they pay interest. is it monthly or quarterly or daily, which will effect what you will get. Basically, for a 12 month CD you would get approximately $15 and for 6 months $7.50.