How to Explain Certificates of Deposits Rates
If you want a safe place for your money, but want to earn more interest than a traditional savings account, you should consider a certificate of deposit (CD). CDs require that you leave the money in the bank account for a predetermined period of time, but in return, you receive a higher interest rate. In addition, CDs are still FDIC-insured, which as of 2010, covered up to $250,000 of accounts per person, per bank.
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Instructions
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Explain that the annual interest rate, sometimes called the annual percentage rate or APR, differs from the annual percentage yield, or APY. The APR does not take into account interest compounding, while the APY does. As a result, if interest compounds on the CD more than once per year, the APY will be higher than the APR. As a result, you need to compare APRs to APRs or APYs to APYs to make an accurate comparison of CD interest rates.
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2
Teach that CD interest rates are typically higher for long-term CDs because the bank is guaranteed to have your money in the account for a longer time period.
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3
Clarify that CDs with larger initial deposits will usually have a higher interest rate. Since you are promising the bank more of your money, the bank will generally offer you a higher interest rate.
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4
Warn that interest from the CD may not be accessible right away. Many CDs automatically pay the interest into the CD account, so the account holder may not be able to withdraw the money until the CD matures without paying an early withdrawal penalty. Penalties vary, depending upon the length of the CD.
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5
Explain that CD rates are usually fixed for the duration of the CD, regardless of whether market interest rates increase or decrease. An exception to this is with a jump CD, which permits the holder to change the CD interest rate to the market rate once during the term of the CD.
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