How CDs Work

What is Certificate of Deposit?

A Certificate of Deposit (CD) is a type of fixed-income investment product that is offered in banks and credit unions.  It is a short to medium-term investment which is fully insured by the FDIC up to $250,000.

When investing in a CD, clients decide to put their money in the bank for a specific period of time, and in return, the bank pays them an agreed interest rate which is typically higher than the regular savings account. Banks usually impose a certain penalty for CD withdrawals made before the maturity or the end of the term.

How CDs Work

Availing of a CD is simple. Just visit the bank of your choice and tell them of your intention to buy a CD. You will most likely be asked for some personal data or sign some forms prior to the opening of your CD account.

If you already have an existing savings or checking account in that institution, the bank will make the necessary arrangements to transfer your money to a CD account according to your preferred terms.

When a CD earns interest, it can be paid via check, transfer to a savings account, or capitalized. With interest payments via check or transfer, it is up to you how you reinvest or spend the interest. On the other hand when you choose to capitalize your interest payments, this simply means that the CD yields will be reinvested into the account, making it part of the principal amount. The investment will grow more quickly in this manner.

The end of the term is what is known as the CD maturity. Upon maturity, you can take either of two courses of action: renew the CD or take out the money. Keeping track of your maturity date is especially important because when banks do not receive any instructions from the customer regarding the matured CD, they will automatically renew this for the same term after a prescribed period of time, usually 10-15 days.

What is a Jumbo CD?

A jumbo CD is a CD in a very large denomination, usually at a minimum of $100,000 thousand. Jumbo CDs are commonly bought by large institutional investors, such as banks and pension funds, who are interested in low-risk and stable investment options.

Jumbo CDs are also known as negotiable certificates of deposits, and come in bearer form. It  works like a conventional certificate of deposit that locks-in the principal amount for a set time frame and is payable upon maturity.

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