What Is a Certificate of Deposition?

A certificate of deposit (CD) is an interest bearing account using a fixed rate of interest. The consumer deposits money in to a CD account. The financial institution (usually banks or credit unions) provides you a certificate promising to pay you your deposit and an agreed interest rate at the end of the term of agreement. Below are some tips for helping you determine if a CD is right for you.

  1. Insured

    • A certificate of deposit is insured by the FDIC up to $100,000.

    Fixed Term

    • A certificate of deposit has a predetermined amount of time until it reaches maturity. Maturity can range from several weeks to months or years. Early withdrawal will result in penalties.

    APY vs. APR

    • A certificate of deposit will usually have a fixed rate of interest. The way they calculate interest is what makes a difference. Annual Percentage Yield (APY) considers compound interest during the year. Annual Percentage Rate (APR) does not. When interest is annually, its rate and yield are the same. If it's paid more often the interest is higher.

    Low Risk

    • A certificate of deposit is a low-risk investment tool since it is insured by the FDIC.

    Minimum Deposit

    • A certificate of deposit usually has a minimum amount you must deposit to open the account.

    Small CDs vs. Large CDs

    • Small CDs are CDs that are under $100,000. Large CDs are over $100,000. Large CDs are also referred to as Negotiable CDs.

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