A fixed deposit — the same product often called a CD in the United States — pays a locked-in rate in exchange for leaving your money untouched for a set term. The interest calculation is straightforward once you have the rate and term; the part people underestimate is what an early withdrawal actually costs if plans change.
Calculating Interest and Maturity Value
Maturity Value = Principal × (1 + Rate)^(Term in Years) Interest Earned = Maturity Value − Principal
On a $10,000 deposit at a 5% annual rate for 2 years, that's a maturity value of $11,025.00 and interest of $1,025.00.
What Early Withdrawal Actually Costs
Most fixed deposits charge a penalty for withdrawing before the term ends, commonly expressed as a certain number of months' worth of interest. On the same $10,000 deposit at 5%, a 3-month interest penalty works out to:
Penalty = Principal × Rate × (Penalty Months ÷ 12) = $10,000 × 5% × (3 ÷ 12) = $125.00
That $125 comes directly out of whatever interest has accrued so far — on a deposit that hasn't been open long, the penalty can end up eating most or all of the interest earned to that point. Policies vary meaningfully by bank and by term length, so this is worth checking against your specific deposit's actual terms before assuming a penalty amount.
Why the Term Length Changes the Math So Much
A longer term gives compounding more time to work, which is why maturity value doesn't scale in a straight line with term length. The same $10,000 at 5% grows to $10,500 after 1 year, but to $12,762.82 after 5 years — more than five times the one-year interest, not exactly five times, because each year's interest is calculated on a growing balance rather than the original principal alone.
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