Certificate of Deposit (CD)
"Certificate of Deposit (CD)" submitted by SchoolGrantsfor Editorial Team and last updated on Wednesday 27th April 2011
The bank pays you a set interest rate on a set amount of money over a predetermined period of time. What that means is if you put money away for a set period of time without touching it, the bank will pay you a higher interest rate than it would on a regular savings account that you can withdraw money from. Generally the longer the term of the CD, from as short as seven days to as long as ten years, the higher the interest rate yield. This is a simple way to earn a higher fixed interest rate with no fees.
An insured, interest-bearing deposit at a bank, requiring the depositor to keep the money invested for a specific length of time. If you don’t need your money for six months or longer, then a CD is a good option. A CD pays you more interest the longer you agree to lock away your money. Most CDs require a minimum deposit (usually from $250 to $1,000), pay a higher interest rate, and don’t allow any additions or withdrawals from the CD for the period of the CD (usually six months to five years). If you take your money out of a CD early, you could be charged a penalty, usually equal to three months’ worth of interest.
CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank" (CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or by the National Credit Union Administration (NCUA) for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.
A person can buy a certificate of deposit (CD) by depositing the minimum requisite amount. In general, the higher the deposited amount, the better will be the interest rate offered on it. The buyer of a CD receives a written declaration or certificate wherethe applicable interest rate, term of deposit and date of maturity are stated.
When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. If you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned.
Investors searching for relatively low-risk investments often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $250,000.
Most banks are members of the FDIC, a government agency that insures bank deposits. You are eligible for $100,000 of deposit insurance for all the deposits you own at one bank in each recognized ownership capacity. For example, all the deposits (CDs, checking accounts, etc.) you own at one bank in your own name are insured up to a total of $100,000. You are eligible for an additional $100,000 for all deposits you own at one bank in joint accounts and another $100,000 for Individual Retirement Accounts.
The FDIC’s brochure Your Insured Deposit explains deposit insurance coverage in more detail. You can obtain the publication from the FDIC and from most banks and securities brokers. You can contact the FDIC by mail (550 17th Street, N.W., Washington, DC 20429), by phone (800-276-6003) or by e-mail. You can also visit the FDIC web site.