June 2, 2020

Certificates of Deposit – A Wise Investment?

cd rate depositCertificates of deposit, also known as CDs are a unique investment account that allows people to obtain a low risk investment that is insured by the federal government. Similar to your normal savings account, a CD will pay a specific interest rate. Generally, CD rates are higher than what a saving account yields. Between being insured and getting a higher than normal interest rate, CDs are great ways to save money for many people. Certificates of deposit have come a long way since their inception. Today, you can find CDs that offer fixed interest rates, variable interest rates, and some that have unique redemption characteristics. You can purchase CDs from banks, you can purchase CD’s from brokerages, and thrift institutions.

How Do CD Rates Operate?

You should have a good understanding on how this investment will work in your favor prior to placing any money down. Below is a list of what you can expect from certificates of deposit and CD Rates:

  • Certificates of deposit are available for a fixed amount of time for a specific amount of money.
  • Generally, CDs are available in time periods that range from 6 months to over 5 years.
  • You will be paid interest based on the cd rates available at your investment institution. The amount you receive depends on how much you have invested and the CD rate.
  • You will receive the principal investment amount in addition to all accrued interest upon the maturation of the CD.
  • You will be subject to early withdrawal fees and penalties if you redeem your CD before the maturation date.

Variable CD Rates and Fixed CD Rates

Now that you know how a CD operates, you may choose from a fixed rate or variable rate CD. Always make sure that you know what type of CD you are buying before you finalize anything with your investment institution.

You will need to do the following depending on what type of CD you have chosen:

  • Find out what the current CD rate is for the investment you are interested in using. Knowing this will allow you to estimate your income from the CD.
  • Inquire about when interest payments are made. Depending on the issuer, payments will be made monthly, quarterly, bi-annually, or at maturation.
  • Learn the ways you can collect your money. Paper check, electronic funds transfer, and bank wire are all popular methods of distribution.
  • If you have a variable rate CD, try to find out when CD rate changes normally happen and plan accordingly. Your investment institution will be able to tell you when and in what way your CD rates may or may not change. A lot of times the rate changes are predetermined, so you will be able to have a good idea about any income changes that you may be facing.

By internalizing the information presented in this article, you will have a good understanding on how CD rates work. Knowledge in this area is the best way to meet your investment goals.

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For other information on CD Investing Visit these sources:

The Securities and Exchange Commission
The Federal Trade Commission