A certificate of deposit, is a certificate issued by a bank, indicating that the investor has deposited a sum of money for a specific time period and at a specific interest rate. So, the money deposited, is for a given period of time and at a fixed rate of interest.

Advantages of Certificate of deposit.

The main advantage of CD’S is that they are relatively safe and you are able to know your returns, well before time. Also, you don’t have to depend on the stock market.

Gaining access to the national CD market, involves low minimum investment. The returns of the principal amount on your CD’S and all your interest payments, will   automatically get credited to your account. Early withdrawals with regard to CD’S are not permitted. In circumstances like death and disability, early withdrawals, without interest penalty is permitted. You can sell your CD’S  in the secondary market, before the maturity date. In that case, you will get paid depending on the market conditions at that time.

Disadvantages of Certificate of deposit.

Once you have invested in CD’S, you will not be allowed to touch that invested money,  depending upon the time limit. If you try to get it out before its maturity period, then you will have to pay a heavy penalty to do so. Since the interest rate is fixed for the term of the CD, you are liable to bear interest rate risk.   

The term of a Certificate of Deposit generally ranges from one month to five years. A CD restricts withdrawals by the holder prior to its maturity date, which typically ranges from one month to five years.

A certificate of deposit (CD) is the best way to save money and earn a higher interest rate compared to other money market investments. One has to note that CD’S are not liquid and your funds are locked for a particular period of time. You will loose interest, if you try to withdraw early.

Mainly, in a CD, you are promised your principal plus a fixed amount of interest, which you receive periodically throughout the time period. Once the period expires, you can then cash out the principle and the interest or move the CD for another following period.

Normally, it is not advisable to buy a CD with a period of more than five years. The situation with regard to the interest rate could change drastically during that time and thus you could get held up with a long period, low rate type CD. You can purchase CD’S for various duration. The most popular are between three months and five years.

CD interest rates are sometimes linked to the stock market or bond market. Since CD’S involve money that is invested for a fixed period of time, they (CD’S) usually earn higher interest rates than savings accounts.

Before investing in a CD, you must first decide on certain things like, the duration of the CD, how much you would like to invest, and what you’d like to do with the interest earned. The interest earned may be either reinvested or distributed to you when earned.

You must be in a position to anticipate whether the present interest rate will be rising or falling. You can use your money for a short term CD, if you think that interest rates will go up. You can keep the money for a stipulated period until you reach a point where they are high enough to represent an attractive return for you. Once you reach this stage, you can then switch to a longer CD term investment.

Withdrawing funds from a CD before maturity typically incurs a substantial penalty, such as six months interest for a five-year CD. It is not advisable to the CD holder to withdraw money before maturity unless there is a good reason. By investing your money in CD’S, you are letting the bank to use your money for that specific amount of time. If you decide to withdraw money before the time period is over, the bank charges you a fee in the form of a penalty. CD’S can act as a good investment vehicle for people of all ages. If you have a lot of pending money in saving accounts, then in that case you can wisely invest in a CD. CD’S are insured based on the FDIC (Federal Deposit Insurance Corporation) and NCUA (National Credit Union Administration), guidelines. A single account can cover up to $100,000 and joint accounts are covered up to $200,000.

A certificate of deposit aka high CD rates or so called, “time deposit”, in USA, is a familiar product, commonly offered to consumers by banks and Credit Unions. Such CD’S are similar to savings accounts and are being insured by the FDIC for banks or by the NCUA, for Credit Unions and thus is virtually risk free. They are different from savings accounts. CD involves a specific, fixed term-often three months, six months or one to five years and usually at a fixed interest rate. In the case of a CD investment, the money is held until maturity and then on the maturity date, the money may be withdrawn together with the earned interest.

There is a strict rule of “penalty” caused for early withdrawals. The Federal Law states that all highest CD’S that are withdrawn early, before its maturity date, are subjected to a minimum penalty of at least seven days simple interest on amounts withdrawn within the first six days after deposit. Other than this rule, the banks are free to set their own penalties. There is no maximum limit on penalties. Remember, that early withdrawals of CD’S before its maturity date, can lead to taking away of your interest and even some of your invested principal amount.

Before you buy the CD, be sure that you have enough money to cover any emergency expense so that you don’t have to use your CD account which will lead to a penalty for having withdrawn your CD before its maturity date. In some cases, early withdrawal penalties can be waived. This can happen only in circumstances such as in the case of the owners death or the owner is declared mentally incompetent. There is a technique involved whereby you can invest in CD’S and yet not pay a penalty for early withdrawal. If you purchase a CD from a broker, you may not be penalized for having done an early withdrawal. You must keep in mind that in this case, you are trying to withdraw the CD by selling that CD on a secondary market and thus you accept what you get in return. So if you ever feel the need to sell your CD’S, before the maturity date, you can do so by selling it in the secondary market. You will then get paid depending upon the present market rate.

Getting the highest CD rates isnt just about finding a good bank. Smart bankers will use what is called CD laddering. A CD laddering strategy, facilitates the investor to open several smaller CD accounts instead of just one big account. CD laddering is certainly a good way of taking advantage of the additional interest of deposit while minimizing the loss of liquidity that a time deposit requires.

For example. Instead of investing just in one CD of $40,000, the investor may open four CD’S of $10,000 each, for periods that increases in steps of one, two, three and four years. When the matured date for the CD arises, it can then be reinvested into a new four year CD or you can utilize the funds for whatever purpose the investor seems is appropriate.

How High Can Certificate of Deposit Rates Get?

The most important point to be considered while laddering CD’S is that one has to be sure that the maturities match with your cash budget. It would not be a good thing to have a one year CD and then if an emergency arises within the term period, you will feel the pinch of money since you would not be in a position to use that money since your money is locked investment plan. So, you must think from various view point, before laddering CD’S. You may feel that it is advisable to considering a five year ladder, since it may allow you to take advantage of the best interest rates but your ladder could be shorter if it makes you more comfortable. The steps taken by you should all depend on your own suitable needs. Don’t compare your needs with others while investing in a CD.

Meanings:

Initial deposit = It indicates the starting balance for your CD

Months = The total number of months for this CD to mature.

Interest Rate = The published interest rate of a CD. Make sure to enter the actual interest rate, not the Annual Percentage Yield (APY).

Annual Percentage Yield ( APY) = This is the effective annual interest rate earned for a CD. A CD’S APY depends on the frequency of compounding and the interest rate. Since APY measures your actual interest earned per year, you can use it to compare CD’S of different interest rates and compounding frequencies.

Compounding = Interest earned on your CD’S accumulated interest.