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  Wednesday September 26, 2018

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Learn even more about this topic with the Encyclopedia of Personal Finance™

Certificates of deposit (CDs) are time deposits issued by banks and credit unions. They are sometimes referred to as small savings CDs.

CDs are short-term (usually one month to two years), and they pay interest at the end of the term (when the CD becomes mature). They often pay a higher rate of interest than a savings account. CDs that take longer to mature tend to pay higher interest rates. The minimum initial investment varies from bank to bank and from CD to CD, but is usually $250 to $1,000.

When you deposit money into a CD, you must leave it there for a specified term for a stated interest rate (although some CDs have variable rates). You will receive both principal and interest at maturity. With CDs, you know how much you will earn, and you know when the money will be available to you. CDs are suitable for investors who need low-risk investments with fixed maturity.

You may be charged a penalty if you withdraw your money from a CD before maturity. Usually, this penalty is three to six month's interest.

CDs issued by banks, credit unions, and some savings and loan associations are insured by the FDIC for up to $100,000 per depositor.

Brokerage firms also sell CDs. They look for CDs with competitive rates and offer them to their customers. You pay a fee for a CD bought from a broker. CDs purchased from a broker may not have FDIC insurance.

There are many variations on CDs. For example:

  •  Variable-rate CDs offer rates that change along with interest rates.

  •  Add-on CDs allow the investor to add to them after they have been opened.

  •  Discount CDs are sold to the investor for less than their face amount. Upon maturity, he or she receives the original face amount of the CD.

  •  Negotiable CDs come in $100,000 denominations and can be traded on the market like stock.

Next you will learn about another, very popular interest-bearing investment: bonds.


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