What Is A CD?

Answer:
A CD is also known as a certificate of deposit.

In volatile investment times such as we are in today, a CD is a relatively safe investment, although they generally pay relatively low rates of return.

A CD, or certificate of deposit, is a special type of deposit account with a bank or thrift institution that usually pays the depositor a higher rate of interest than a regular savings account will. Just like a regular deposit account, but unlike other riskier investments, a CD will have federal deposit insurance of up to $250,000. Even if the deposit institution fails, you will not lose any money up to that amount.

When purchasing a CD, you will invest a fixed amount of money for a fixed period of time (three months, six months, one year, or even longer), and the bank will pay you interest on that money at regular intervals. When the CD is cashed in or redeemed, you will receive all of the money you originally put into the CD, plus any accrued interest. If you need the money early, you may be forced to pay an early withdrawal penalty or forfeit a portion of the interest you have earned.

Most of the time, you will purchase a CD directly from the bank, although now some brokerage firms and salespeople are now offering CDs. These other groups are known as “deposit brokers,” and sometimes they can negotiate higher rates of interest for a CD by promising to bring a certain amount of deposits to the institution. The deposit broker will then offer these negotiated rate CDs to their customers.

At one time, CDs would only pay a fixed rate until maturity. However, now CDs are more complicated. There are now variable rate CDs, long term CDs, and CDs with other features. Some long term CDs have the right to be “called” by the bank that issues the CD.