© jollyUK (Flickr) Money
© jollyUK (Flickr)
Definition of a certificate of deposit
A certificate of deposit is also known as a CD, and it is a unique kind of deposit account that a person can purchase at their local bank or financial institution. A CD offers a higher interest rate than a savings or checking account, and it also has federal insurance on deposits up to $250,000. A CD is good for people who are looking for low risk investments.
How does a certificate of deposit work?
A certificate of deposit is a simple deposit account to have. When a CD is purchased, a person can determine how much money they would like to invest, and for a fixed length of time such as six months, one year, five years, or more. The bank then pays interest at regular intervals during the time that the money is invested in the CD.
When can a CD be cashed in?
A certificate of deposit can be cashed in when it reaches its maturity date, and the owner of the CD will receive the original money they invested, plus the accrued interest. If the CD is cashed out prior to the maturity date, then an early withdrawal penalty is attached to the accrued interest.
Types of Certificate of Deposits
Brokerage certificate of deposits
Even though CDs can be purchased from almost all banks, they can also be purchased from a brokerage firm. Brokers who sell CDs are known as “deposit brokers”. They are known to be able to negotiate a higher interest rate than the interest rate on a traditional CD.
Brokerage CDs have a higher interest rate because the broker usually promises to bring in a certain amount of deposits to the financial institution that the CD was purchased from.
Long-term high yield certificate of deposits
Most long-term high yield CD’s have a “call” feature, and this feature allow the financial institution who issued the CD to terminate or “call” the CD. The issuing financial institution has the ability to “call” the CD after one year, or any other fixed period of time. The reason that a long-term high yield CD may get “called” is if interest rates fall, but if interest rates raise, then the owner of the CD will be locked in at the lower rate.