Looking to buy Certificate Of Deposit investment? CDs are fixed-income investments offered by banks and are also insured by the FDIC up to 100,000 USD. But how to buy a Certificate of Deposit?
Once you have already decided to buy a CD, you have to know where to buy. You have to take note that CDs can either be purchased from a bank, a brokerage firm, or a credit union. Some of these banks require you to apply in person while others may just allow you to apply online.
Terms When You Buy A Certificate Of Deposit
Although certificates of deposits can be purchased for any period of time, most investors prefer to buy CDs with a maturity between 3 months to five years. The old rule indicates that the longer the duration of the CD account, the higher the interest rate it gets. This is one big advantage in having a CD account compared to savings or money market accounts.
The only disadvantage to CD accounts is that they lack liquidity. Once you have tied up your funds, they are no longer yours for a certain period of time. However, if you intend to withdraw your funds because you are in need, the Federal law mandates that when CD funds are withdrawn earlier than the maturity period, you are subject to a minimum penalty of 7 day’s simple interest on amounts withdrawn within the first 6 days after deposit. Take note that banks are also allowed to set their own penalties for an early withdrawal from a CD. So you have to be vigilant when researching about corresponding penalties.
Types Of Certificate Of Deposit To Buy
Once you have already decided to buy a CD, you will definitely have to decide the type of CD you want to buy. Here are several types of CDs that you can choose:
- Traditional CD: This is the old standby type of CD. When you buy this, you simply choose a fixed amount of money which is invested for a preset period and interest rate.
- Bump-Up CD: this allows you a one-time option to bump up your interest rate. For example, when you purchased a 3-year CD, a year that is added to your CD will increase the interest rate! The only downside is that the initial interest rate is lower than the traditional 3-year CD.
- Liquid CD: here, you can withdraw money without a penalty. However, your interest rate for this type of CD is lower.
- Zero-Coupon CD: to par value, you are going to buy which is the amount you will get when the CD matures. The term ‘coupon’ refers to an interest payment and zero-coupon means zero interest payments. Here, you will not receive interest until the maturity of the bond.
- Callable CD: here, the bank can repurchase its CD from you after a stated interval. Usually, banks do this when interest rates drop so the bank can reissue the bonds it calls in at a lower rate. Here, you get a higher interest rate because of the call option that is embedded in your CD
So if you are in the process to buy Certificate Of Deposit then ensure you choose one that suits you and ensure you learn about all the terms and conditions.