How this page differs from the other two interest pages here
Three calculators on this site do interest arithmetic and they answer different questions. The compound interest calculator projects a balance over years, with optional ongoing contributions and a choice of compounding frequency; it is for growth. The savings calculator handles a fixed amount deposited every month, where each deposit earns for a different length of time. This page is for the narrow case of one lump sum locked for a term measured in months, which is what a certificate of deposit or a fixed-term deposit is, and it adds the two things that matter for that product specifically: the annual percentage yield the stated rate works out to, and the cost of breaking the term early.
Simple, monthly and annual, and why the gap is small
Simple interest is principal times rate times time, credited once. Monthly compounding credits interest to the balance twelve times a year so that interest starts earning interest. At 4 percent over one year on $10,000, simple pays $400 and monthly compounding pays $407.42. The $7.42 difference is what all the argument about compounding frequency amounts to at one year.
It grows with the term and with the rate, because it is a second-order effect on both. Over five years at 4 percent the same deposit earns $2,000 simple against $2,209.97 compounded monthly, and the gap is no longer trivial. Below about a year at ordinary rates, the compounding basis is worth less than the difference between two institutions' advertised rates, and choosing on frequency rather than on rate is optimising the wrong number.
APY is the number that makes two offers comparable
A stated rate is not a yield until you know how often it compounds. Annual percentage yield folds the compounding into a single effective annual figure, so 4 percent compounded monthly is an APY of 4.074 percent, and 4.05 percent compounded annually is an APY of 4.05 percent. Compared on the stated rate the second looks better; compared on APY the first is. This page reports the APY implied by the term you entered, which for terms other than exactly twelve months is the annualised equivalent rather than a quoted product figure.
APY here is calculated before tax, because tax depends on you rather than on the account. Comparing two deposits on their pre-tax APY is valid as long as both are taxed the same way, and stops being valid the moment one of them sits in a tax-advantaged account.
The early withdrawal penalty is the real term of the contract
Locking money up is the whole trade: you accept the lock, the institution pays more than it does on an account you can drain at any moment. The penalty is what enforces it, and it is usually expressed as a number of months of interest rather than as a percentage of the balance. Three months of interest on a one-year deposit is a quarter of the total return, so breaking a twelve-month term at month six leaves you with roughly half the interest minus three months of it, which is a fraction of what an ordinary savings account would have paid over the same six months.
Two details are worth reading in the actual agreement. The first is whether the penalty can reach the principal when very little interest has accrued; this calculator caps it at the interest earned, but not every institution does, and closing in the first weeks is precisely the case where it bites. The second is whether the penalty is quoted on the original term or the remaining one, since a long-term deposit broken near the end can carry a penalty far larger than the interest still to come.
Weigh that against the alternative before locking anything up. The premium a term deposit pays over an accessible account is often modest, and if there is a real chance of needing the money, the penalty will eat that premium several times over. Money you might need is not money that belongs in a term.
Questions people ask
What is the difference between the rate and the APY?
The stated rate is the nominal annual figure the interest is calculated from. The APY is what you actually earn once compounding is applied. They are equal only when interest compounds exactly once a year, and the more often it compounds the further APY sits above the stated rate: 4 percent is 4.074 percent APY compounded monthly and 4.081 percent compounded daily. When comparing two accounts, compare APY, and if only one of them publishes an APY, treat the mismatch as a reason to ask.
How is deposit interest taxed?
That depends on the account type and the jurisdiction, which is why this page defaults the rate to zero and takes whatever you enter rather than applying a schedule. In many places interest in an ordinary account is taxable as income in the year it is credited, whether or not you withdrew it, while interest inside a retirement or tax-advantaged account is deferred or exempt. Some institutions withhold at source and some do not. Get the rate that applies to your situation from your own tax authority or an adviser and enter it, and treat any figure a calculator supplies for you as a placeholder.
Is a longer term always better?
Only if the rate is higher and you are certain you will not need the money, and neither is reliable. Longer terms sometimes pay less than shorter ones when rates are expected to fall, which is the yield curve doing its job rather than an error in the offer. And a longer lock magnifies the penalty risk: the same three months of interest costs proportionally less on a five-year deposit than on a six-month one, but the chance of needing the money at some point over five years is much higher. Splitting a sum across several maturity dates, so that something matures regularly, is the standard answer to not knowing.
What happens when the term ends?
It varies by institution and it is worth knowing in advance, because the default is often automatic rollover into a new term at whatever rate is current that day, which may be well below what you had. There is usually a short grace period after maturity in which you can withdraw or move the money without penalty, and it is short. Diarise the maturity date at the moment you open the account, not when the notice arrives.