The 123s of CDs
A Certificate of deposit is a special type of deposit account similar to a savings account with a bank or thrift institution that typically offers higher CD rates than savings account rates. Just like s savings account, certificate of deposit accounts have federal deposit insurance up to $250,000.
When you purchase a certificate of deposit, you invest a fixed sum of money for fixed period of time. The duration can vary greatly, there are CD terms of six months, one year, five years, or more more. In exchange for placing your money into a CD account for a fixed period of time, the issuing bank, credit union or financial institution pays you interest, typically at regular intervals which can be monthly, quarterly or yearly.
When you cash in or redeem your CD, you receive the money you originally invested (your principal) plus any accrued CD interest. If you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned.
Although most investors buy CDs directly from banks, or credit unions, many brokerage firms and independent salespeople also offer CDs, sometime with higher CD rates. These individuals and companies are known as “deposit brokers”. Sometimes these CD deposit brokers can negotiate the best CD rates for a CD by promising a bank to bring a certain amount of investors to the institution. These CDs are marketed by deposit brokers as "brokered CDs”. These CDs also differ than regular CDs if you decide you want to cash in your CD early.
There used to by only one flavor of CDs that paid a fixed interest rate until they reached maturity. Just like other investments CDs have evolved in today’s markets and have become a lot more complicated. You have many choices now when investing, there are variable rate CDs, long-term CDs, and CDs with other special features.
Some longer term, high-yield CDs have what is known as a “call” feature. This means that the issuing bank may choose to terminate – or call – the CD after only one year or some other fixed period of time. Only the issuing bank may call a CD, not the investor, if you decide you want your money before the maturity date you will pay an early withdrawal penalty.
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