How Do I Get Paid CD Interest Rates?

CDs, or certificates of deposit, are investment options offered by banks and brokerage firms. These investments offer stability for investors but lower rates of return than more risky investments. A CD can also offer a fixed income over its life.

  1. Purchasing a CD

    • In order to be paid the higher rates that certificates of deposit offer over a regular savings account, you must invest in one. When deciding what certificate of deposit to invest in, consider the length of the term, the interest rate and the penalties for early withdrawals. Even though you may now think that you will never need to make an early withdrawal, an emergency could arise. Also, the more money you are able to invest initially and the longer the term, the higher the interest rate you will get.

    Advantages of a CD

    • A certificate of deposit is advantageous for conservative investors who want a guaranteed rate of return on their money. Unlike stocks and mutual funds, which can lose money, certificates of deposit have a set interest rate for the length of the term. Because the bank is guaranteed to have the money for a set period of time, it is willing to pay a higher rate of interest than it would with a savings account or checking account. Certificates of deposit are also insured up to $250,000 per person.

    Disadvantages of a CD

    • Certificates of deposit lock your money into an investment for a specified period of time during which you cannot move the money to a better performing investment or withdraw it for a personal need without paying a significant penalty. This penalty is called an early withdraw penalty and by law it must be at least 7 days' worth of interest and there is no cap on the penalty. Typically banks charge about three months' interest for certificates of deposit as a penalty for withdrawing early if the term is less than two years and six months' interest if the term is two years or more. Also, because the interest rate is guaranteed, the return tends to be lower than more aggressive investments like stocks.

    Interest Payments

    • Interest payments on the certificate of deposit can either be made to you on a monthly basis or they can be reinvested. Whether you elect to receive your interest payments by check or have them deposited to another account, they remain constant for the term of the certificate of deposit. If you are investing because you want a guaranteed fixed income, CDs are a good option. If the interest is reinvested in the certificate of deposit, the principal will increase over time and result in higher interest accruing on the CD.

    How to Calculate Reinvested Interest on a CD

    • In order to calculate how much a certificate of deposit will be worth when it matures, use the following formula where P is the principal invested at the start, I is the interest rate, N is the number of times per year that interest is compounded, and T is the term in years:

      Value at Maturity = P (1 + I / N) ^ (N T)

      For example, if you invested $20,000 in a CD that paid 4 percent interest, compounded monthly and matured in 2 years, the value of the CD at the end of the term would be $21,662.86.

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