What is a 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
Opening 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, ID and to sign account forms prior to opening 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, transferred 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.
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