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Certificate of Deposit
A certificate of deposit, or C.D. is a short-term money market financial instrument that pays a fixed rate of interest at the end of a specified period of time. For this reason these financial products are also know as “term deposits”. C.D.’s are issued by American banks, thrift (savings) institutions and credit unions, and are generally considered virtually risk free, or “money in the bank”. These types of bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) in the case of banks and thrift institutions, and by the National Credit Union Association (NCUA) in the case of the credit unions.
Minimum deposits are normally required to open up a C.D. account, and as the money is essentially locked up for a specific period of time, the interest offered on these accounts is higher than that received from basic savings or money market checking accounts. The main principle behind a C.D. is that your money is locked away for a fixed period of time, at the end of which you receive back your initial principal amount plus a fixed amount of accrued interest. However, a word of caution… If you need to withdraw your funds before the final maturity date, then you will likely pay a heavy penalty. In fact, this penalty can exceed the full amount of interest due on the financial instrument itself, meaning that you will end up losing part of your original principal amount. There is some flexibility with C.D. accounts, however, and you are normally permitted to decant any accrued interest prior to maturity date.
As your deposit approaches maturity date, you will normally be informed of the fact by the financial institution offering the C.D. On maturity date you can take your funds and full amount of interest. However, should you decide not to withdraw your funds, then the C.D. will enter a similar deposit period. This is termed “rolling over” your C.D. and is common practice with this type of account. C.D.’s are one of the safest, most rewarding ways of saving money today, so consider them carefully when mapping out your financial savings plan.
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