How to Compare Interest Rates on Certificates of Deposit
Certificates of deposit, also known as CDs, offer a set interest rate for a predetermined period of time. When comparing the rates on different instruments, you need to consider more than the nominal quoted interest rate.
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Yield
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The higher the interest rate, the better for certificates of deposit. However, place more emphasis on the annual percentage yield because it takes into consideration compounding, which can make a CD that only compounds interest annually return less than a CD that compounds interest monthly.
Time Frame
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When you put money in a CD, taking it out before it matures requires you to pay an early withdrawal penalty. Though longer terms typically offer higher interest rates, make sure you will not need to take the money out before the end of the CD.
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Function
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When CDs pay interest, the money can either be added to the account so it continues to earn more interest, or paid out to you. If you are looking for a steady source of income, you may have to settle for a lower interest rate because if the money is deposited into the CD, you cannot access it until the CD matures.
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