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Types of Bank Investments
Certificate of Deposit
Types of IRAs
401k Plans
Types of Bond Investments
Fixed Income Investing
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Certificate of Deposit
Infographic About CDs
Certificate of Deposits
The Certificate of Deposit or CD, as it is more popularly known, is a money market investment option very similar to a MMA in many respects. Both are offered by banks and credit unions, and both promise higher interest rates than traditional savings accounts. Similar to a MMA, a CD is one of the safest investments in money market instruments because of the FDIC or NCUA guarantee backing it.
But a CD is less liquid than a money market account. Usually a CD comes with a specific lock in period say, three to six months or 1 to 5 years. If the investor wants to pull out before this period is up, he or she will have to pay a premature withdrawal penalty. The penalty is informed about at the time of opening the account and it is put in place to dissuade withdrawals and encourage investment.
CDs are good options when prevailing interest rates are high. Your interest is insulated against market fluctuations until the end of the investment lock in period. However, some institutions do offer variable rate CDs too. These can be of many types.
One of the common types is the CD linked to the market index. The final interest amount that you earn on such CDs depends on the initial and final index value.
One critical difference between a CD and a MMA is that, for higher deposit values, a CD is likely to offer higher interest rates. Before you start looking for CDs that yield the best rates, it is necessary to understand the annual percentage yield that you would derive from each option.
This yield shows the rate of return you will stand to get, after the compounding of the interest is taken into consideration. The APY (annual percentage yield) of the CDs you are considering should give you a good idea of how beneficial they are when compared to others.
