What Is the Proof of Deposit in a Bank CD?
A certificates of deposit (CD) is a popular savings vehicle offered by banks and credit unions. A CD offers a safe investment with a higher rate of interest than a savings account, although you don't have ready access to your money until the CD matures. The issuer will give you proof of deposit for a bank CD, as well as provide information about terms and conditions.
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Identification
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When you purchase a CD, you are loaning the bank or other institution your money. The CD is a promissory note that spells out the conditions and serves as a receipt (proof of deposit). The distinctive feature of a CD is that it is a time deposit. You agree to deposit your money for a specified period of time in return for a guaranteed interest rate. When the CD matures, you can withdraw your money or "roll over" your money into a new CD. However, if you cash in the CD early, you'll pay a substantial penalty.
Types
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Traditionally, a certificate of deposit was just that----a formal certificate that listed all the terms and conditions of the contract and served as your proof of deposit (much like bonds issued by corporations or governments). Some smaller banks still use traditional paper certificates. However, today most banks simply give you a deposit receipt, just as they do for deposits in savings or checking accounts, along with written brochures spelling out the terms and conditions of the CD.
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Function
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A CD is a short- (three to six months) to mid-term (one to five years) investment. The length of time is called the maturity. If you cash in the CD before it manures, you'll be assessed a penalty. For example, the penalty for early withdrawal for a five-year CD is typically six months interest. If it's a $10,000 CD at 4 percent interest, that comes out to a $200 penalty.
Features
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Investors who want equity protection and a moderately good rate of interest find that a CD is a good investment. The CD comes in various sizes, from a few hundred dollars to 'jumbo" CDs ($100,000 and up). Larger CDs tend to pay better rates, as do those with longer maturities. However, you'll often find the best rates with smaller banks, so it's a good idea to shop around. Interest is normally paid quarterly. You can leave the interest with most CDs, taking advantage of compound interest to get a better return. Alternatively, you can elect to have the money paid out to you every three months. When the CD matures, you have a time "window" specified in the agreement during which you can cash in the CD without penalty. After that the bank will automatically roll over the money into a new CD and it will be tied up until the new CD matures.
Considerations
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CDs are insured by the FDIC (or the National Credit Union Authority for credit unions) and thus are virtually risk-free. They don't offer the earnings potential of stocks and bonds, however. The bank is required by law to provide you with a written statement of the interest rate, maturity, penalties for early withdrawal and other terms and conditions. Regardless of the format (a traditional certificate or a brochure and receipt) be sure you read and understand the conditions of the agreement before you purchase a CD.
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