Certificate of Deposit Accounts
Apr 21st, 2007 by admin
It is the commercial banks and financial institutions that offer Certificates of Deposits to its investors as a form of investment for their money. There is no fixed denomination for the bank to issue these deposits as they are available in any denomination. However when you lend the institution money in the form of a CD, you will not be able to withdraw the money within the time period of the CD.
The benefit of the CD is that in exchange for depositing your money with the bank, you are paid a predetermined rate of interest, called the Certificate of Deposit Rate. It is basically better to have a longer period for the CD as you will then earn a higher rate of interest. The reason the bank can afford to pay increased interest rates is that it reasons out that if it can use your money for their purposes when you deposit the money with them, they can at least offer you the privilege of increased interest rates.
The greatest advantage of a CD is its lack of market risk as they are protected by the Federal Deposit Insurance Corporation when the CDs are issued through a bank. With this protection, there is no possibility of the CD changing with fluctuations in the stock market. And when comparing with other investment instruments like Money Market Mutual Funds, you find that CD rates are quite high.
The disadvantage of CDs is that its early withdrawal of money can lead to a penalty that has to be borne by you. The penalty is usually a loss of interest on the CD for a few months. However it is possible to avoid this drawback by using the ‘CD laddering’ concept. It is possible to calculate the amount of interest you can generate from the CD using a Certificate of Deposit Calculator.
When using the calculator, you have to mention the amount of deposit, the interest rate and the term of the CD. With this information supplied to the calculator, you will be able to find out which CD offers the best interest amount and then decide on the best CD for yourself. It is interesting to learn that CD rates have been between 2 to 16% since the last 30 years.