A bank certificate of deposit can be a very good investment which can provide some of the highest returns in the category of safe and secure investment choices. Most bank CD’s are FDIC insured and therefore carry extremely low risk. Bank CDs come with a variety of terms, CD interest rates and features but all bank CDs have some similar features which should be reviewed carefully before investing.
The interest rate on a bank CD is usually a higher rate than a savings account, because the money cannot be withdrawn until the maturity or full term of the CD. The term of a CD is the period or duration for which the money has to be deposited with the bank. With a traditional bank CD, the deposit in the account is locked for the term of the CD. The CD account holder will not be able to withdraw from the CD within this maturity period. The minimum term or maturity of a CD is usually seven days. The maximum term of a CD is usually five or ten years. The CD interest rate is generally higher the longer the CD term.
The maturity date of a CD is the date on which the CD completes the term. Customers can receive the invested principal along with the interest due on the maturity date. Usually banks and financial institutions provide a grace period after the maturity date after which the CD holder can withdraw the amount. If the customer fails to take action during this grace period, the bank CD will often automatically be renewed for a fresh term at the current CD interest rates offered by the bank. Hence, CD investors should keep track of the maturity date of the bank CD or CDs they invest in.
Most banks inform the customers about the CD maturation well in advance. If you fail to act in time, your money may get locked up for another term with the current CD interest rates now offered by the bank. If the market interest rates have changed significantly, then it will be wise to withdraw the amount at maturity and reinvest in a new bank CD rather than going for an automatic renewal.
FDIC insurance is another feature you have to consider while selecting a CD. The Federal Deposit Insurance Corporation guarantees investments up to $250,000 per person per account type in a bank. FDIC insured CD’s carry less risk and hence this is a compulsory feature to look for while choosing to invest in a CD.
The last and the most important feature of the CD is the interest rate. CD interest rates vary greatly between banks and will vary between the different CD types and CD terms. CD interest rates have the greatest variation based on the term of the CD and the current interest rate environment.
Longer term CDs pay higher interest rates than shorter term CDs and the current interest rate environment or overall level of bank rates will dictate the overall high and low range of bank CD rates. A bank CD rate is often established based on other savings rates and competitive bank rate products and will not have interest rates that are significantly above the average rates available among similar products or investment choices.
The CD interest rates are displayed by the APY or Annual Percentage Yield. APY considers compound earnings based on the CD interest rate offered and the period over which the interest is compounded or added to the account. When comparing similar CD rates, the higher the compounding frequency the higher the rate of return will be on the bank CD account.
Carefully read the terms and conditions before you apply for a bank CD. Compare the bank CD options from a number of banks when choosing a CD account. Bank CD options to review should include the CD interest rate, the term of the CD and the minimum deposit requirement needed to open the CD account.
A CD can be a beneficial financial instrument to obtain a high rate of return and gain financial stability. A little research about the bank CD options and careful reading of the terms will help you to make wise decisions regarding your CD investment.
For more information on the best CD rates by term refer to the following pages; 6 month CD rates, 1 year CD rates, 2 year CD rates and 5 year CD rates.
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