Securing The Best Rates On Certificates Of Deposit

Certificates of Deposits, more commonly referred to as CDs

, are what is known as a time deposit. They are provided by banks and credit unions and function much like a savings account because they are FDIC insured and practically free of risks. CDs differ from savings accounts because they generally offer a higher interest rate.

In exchange, the account holder agrees to keep the money deposited with the bank for a specified period of time, usually three months, six months, or one to five years. The Certificates of Deposits are said to be held to maturity when that time elapses, after which the money can be withdrawn with whatever interest has accrued.

Usually CDs require a minimum deposit. Higher interest rates are sometimes provided for bigger deposits although many financial institutions offer lower rates for CDs that are larger than $100,000, which is considered a Jumbo CD. Account holders who withdraw their deposit before maturity can suffer stiff penalties in the form of months of interest losses.

The interest earned can be paid out as it is accrued or it may just accumulate within the account. The penalties sustained by early withdrawal of the principle can be calculated by months of interest or measured by what it costs the financial institution to regain the losses.

This is because the broker purchases the CD in larger denominations then is able to split it up and sell it to several unrelated investors. Should one of these investors decide to cash in their CD before maturity, the broker can venture to resell the CD at times for a profit. FDIC insurance also applies to brokered CDs, however in the event the financial institution fails, these take considerably longer to claim.

Withdrawing funds before maturity generally incurs a substantial penalty, often resulting in the loss of several months' worth of accrued interest. These fines are in place to discourage the CD holder from cashing in their certificate before the specified term.

Payout of CDs can be arranged to be periodically mailed as checks or transferred in to a designated account, usually these options need to be specified upon purchase of the CD. When the CD is set to mature, banks will notify the holder with instructions and the alternative to rollover the principal and accumulated interest to a new CD. This subsequently ties up funds for another term, allowing it to earn interest but preventing its withdrawal by the CD holder.

by: James A Jackson

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