Define Certificate of Deposit, it is also known as a CD and is a form of time deposit; it is a financial product commonly offered to customers by thrift institutions, credit unions, and banks.
CDs are the same as savings accounts because they are both ensured thus, they are virtually risk-free. They are called “money in the bank” as CDs are insured by the FDIC or by the NCUA when CDs are offered by credit unions. On the other hand, CDs are different to savings accounts in the sense that CDs have specific and fixed terms (often, terms are often 3 months, 6 months, or 1 to 5 years) and that the usually have a fixed interest rate. It is intended that the Certificate of Deposit be held until it matures at which time, the money may be withdrawn with the corresponding earned interest.
Why Certificate Of Deposits Are Inviting
In exchange to the money of the depositor for an agreed term, financial institutions usually grant higher interest rates than they do on accounts that can be with drawn anytime, although this may not be the case in case of inverted yield curve situation. Fixed rates are common, but some financial institutions offer CDs with different forms of variable rates. For an instance, in mid-2004, interest rates were expected to go up so there were many banks and credit unions who started to offer CDs with “bump-up” features. These have allowed a single readjustment of the rate, at a time of the customer’s choosing, during the term of the CD. Sometimes, CDs that are indexed to stock market and bond markets are also introduced.
CDs And Interest Rates
- A larger principal should get a higher interest rate, but in some cases, it may not.
- A longer term usually receives a higher interest rate except in the case of an inverted yield curve (for example, preceding a recession)
- Smaller financial institutions tend to offer higher interest rates than the bigger ones.
- Personal CD accounts are generally getting higher interest rates than the business CD accounts.
- Credit unions and banks that are not insured by FDIC or NCUA generally offer higher interest rates.
How Do Certificate Of Deposits Work?
Certificate of Deposit typically requires a minimum amount of deposit and may offer higher interest rates for bigger deposits. In the United States, the best rates are generally offered on Jumbo CDs with minimum deposits of $100,000 USD. However, there are also financial institutions that do the contrary and offer lower interest rates for their Jumbo CDs. The customer who opens a CD account may get a passbook or a paper certificate; it is now common for a Certificate of Deposit to simply consist a book entry and an item that is shown in the customer’s periodic bank statements; that is, there’s usually no ‘certificate’ as such.