Certificate of Deposit: What It Holds for an Investor

These days, Certificate of Deposits (CD) is increasing in popularity as an alternative to regular savings account. In general, these can be bought from a commercial bank or brokerage houses. They share a similarity with bonds because they are issued in different denominations and have a specific period and a maturity date, which usually ranges between 3 months and 5 years. Another reason why they have gained the current popularity is because; they fetch a higher interest rate in comparison to savings accounts. Interest rates between the banks differ and so does the terms and conditions.

Maturity Period:

Maturity period can start from 7 days to over 48 months and this has a great influence on the CD rate. Sometimes institutions offer maturities that are flexible and allow the investor to select the period of time based on their need for the money. As a general rule, the CD rates are usually high if the period is longer.

Deposit Amount:

Every institution requires the investor to make a minimum deposit amount. This amount is to collect information regarding the interest rate and also the annual effective yield. The rates differ from institution to another institution

CD Interest Rates:

Most times, CD interest rates work on the basis of ‘Compounding Interest Rates’. This means an interest amount is accrued on the earned interest and this might be credited into the CD account monthly, quarterly or annually. This totally depends on the institution’s decision. Though most of the institutions compound interest every day they credit it based on their policy. There are even institutions that do not pay up the accrued interest rate in case if the investor closes the account before the interest credit date as per their policy. Everything will be laid out in the terms and conditions before one signs up for the CD account.

Withdrawal Penalty:

Almost all institutions levy penalty for early withdrawal, which ranges between 7 days interest rate to about a month interest rate.

Interest Payment Methods:

Investors are often provided with 4 different options to receive the interest that has been received on a CD.

• Receive the interest in the form of check monthly or quarterly.
• Receive a credit of interest into the checking account monthly or quarterly.
• The interest can be left in the account so that it adds to the certificate of deposit balance and that in turn earns an interest rate that is equal to the current interest rate of the CD.
• Receive a credit of interest into the savings account monthly or quarterly.