12 Month CDs
12 Month Certificates of Deposit are bank investments with a maturity date of 12 months. These investments are low risk as the FDIC will insure monies up to $250,000. The threshold was raised from $100,000 due to the economic conditions. CD Rates are simply the rate of interest a bank will pay you for your investment.
12 Month CD’s usually offer a higher rate than their 6 Month CD counterparts because the maturity date is longer allowing for the bank to make more money on their “float”. A 12 Month CD is a great option for investors who want a low risk, short term investment.
What is a CD?
A certificate of deposit (CD) is similar to a savings account with some important differences. The minimum balance required for investing in a CD is usually $500 or more, but the minimum for a savings account is much lower. Investors put money in CDs for a specific number of days, months or years, and the interest rates for them are typically higher than they are for regular savings accounts. However, withdrawing all or part of the money in a CD before the maturity date usually involves a penalty. CDs normally renew automatically when they mature, but the new rate on the renewed CD will be the current CD rate at that time. You should receive a notice from the bank several weeks before your CD matures, and you can notify them if you do not want it to roll over. You will not incur a penalty if you withdraw the funds at maturity.
Although higher than the rates for most savings accounts, 1 year CD rates are usually lower than the rates for CDs with longer terms. Early withdrawal penalties are normally lower for deposits with 1 year CD rates as well. A typical penalty for withdrawing from a one-year CD before it matures is 90 to 180 days loss of interest. If you withdraw funds from the CD before it has earned 90 or 180 days of interest, you may lose some of the principle as well.
Most CDs allow you the option of receiving periodic interest payments, usually monthly, or letting the interest compound, or accumulate, in the CD. When you have a CD that compounds, you will earn more by letting the interest stay in the CD. You will then earn interest on the interest, and the principal will increase as often as the interest compounds.
Rates and conditions vary from CD to CD and from bank to bank, so ask questions and read the terms of the CD you choose to invest in before buying it. A CD with a higher interest rate may be worth less at maturity than a CD with a lower rate if the first one only pays interest at maturity, but the other compounds interest. The more often a CD compounds, the more value it will have at maturity. In addition to the interest rate for a CD, be sure to check the annual percentage rate (APR) to determine which will pay more over the term. However, if you choose to receive your interest monthly instead of letting it compound and add to the CD, the CD with a higher interest rate will be the better investment for you.
CDs are some of the most secure investments because government agencies insure them. The Federal Deposit Insurance Corporation (FDIC) insures CDs issued by US banks up to $250,000.
In today’s troubled economy, investments with 1 year CD rates may be a smart way to earn a little extra on your money while you wait for interest rates to go up. Although you will not earn as much as you would for a longer term CD, you will not have the money tied up for a long time, so if the rates improve, you can take advantage of higher earnings more quickly.