How Does a Bank CD Work?

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A CD, which is a certificate of deposit, is a loan from the customer to the bank with the understand that the bank will fully repay the customer at some point in the future including interest. Understand how CDs work, and find a great interest rate, with information from a portfolio manager in this free video on finance.

Part of the Video Series: Credits, Stocks & Pension
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Video Transcript

Have you been reading the signs on your neighborhood bank about CDs and CD rates? Hi, this is Roger Groh of Groh Asset Management. Today, we're here to talk about CDs and how they work. Well, a CD is really a loan from you to a bank, and that bank has agreed, at some point in the future, to pay you back your principle and some interest. That interest rate can vary significantly, depending upon the length of the loan to the bank and what the conditions...economic conditions are at the point that you make that loan to the bank. What the bank then does, so you know, once they receive your money is they loan it out again. They have to keep a little bit -- maybe 10 percent -- to meet the government reserve requirements, but that other 90 is going outside to refinance somebody else's house or a piece of property or a car and they're taking the rate of interest that they're paying you and they're marking it up to charge, again, somebody a higher rate to borrow from them. How much? Oh, figure 300 basis points as a rule of thumb in order for them to cover their expenses. Now, one other point to consider: Most CDs are not guaranteed by the United States government, so you have to be very careful as you look at CDs or CD packages to determine what's right for you. For instance, if a CD has a equal yield to a treasury bill, why would you buy a CD? A treasury bill is going to be guaranteed and a CD may or may not. So shop 'til you drop when it comes to understanding what you're buying, the rate that you're getting, and what it really means to safety in your own account. So I'm Roger Groh. Go get them. You can look in the Wall Street Journal for a general guide as to rates in treasuries and CDs and other bonds. I hope that helps. Thank you very much.

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