CERTIFICATES OF DEPOSIT
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Certificates of deposit (CDs) are time deposits issued by
banks and credit unions. They are sometimes referred to as small
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
CDs issued by banks, credit unions, and some savings and loan
associations are insured by the FDIC for up to $100,000 per
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
- 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.