A certificate of deposit is an investment vehicle with a fixed time period that may be offered by a bank, savings bank or credit union. Certificates of deposit require the investor to deposit a fixed sum of money for fixed period of time with the bank or credit union. The length of time the deposit must be held in the CD is the CD term. The CD term is also referred to as the maturity date.
Certificates of deposits generally have a fixed interest rate as well a fixed term but some CDs have variable rates and rates that change at predetermined periods of time, however all CDs have a set term to maturity. A key characteristic of a bank CD is that fixed term.
Certificates of deposit come with a variety of terms that can range from a few days to several years. The individual that opens the CD will receive the agreed upon interest rate from the bank for the full term of the CD or up to the CD maturity date. Common CD terms are three month CDs, six month CDs, one year CDs, two year CDs and five year CDs although the CD can be any time period that is agreed upon by the issuing bank and the CD account holder.
As simple as this sounds, understanding and choosing the maturity date for a bank CD is one of the most critical choices regarding CD investments. Although there are a number of advantages to bank CDs one of the biggest drawbacks to a bank CD is that most all banks and financial institutions will impose a penalty if you redeem a certificate of deposit prior to its maturity date. The penalty for accessing the funds prior to the maturity date is referred to as an early withdrawal penalty. The early withdrawal penalty is usually the forfeiture of one or more months’ of interest.
When a CD does reach maturity, the account holder can decide what they want to do with the invested principal and accrued interest. The account holder can take the money and move on to another investment or spend it as they see fit or they can have the CD rollover which reinvests the money in another CD with the same bank for the same term at the prevailing CD rate for that term.
If the account holder does not inform the bank on what to do with the expiring CD, most banks have provisions to automatically rollover the CD after a certain number of days have gone by after the original maturity date has been reached. If the CD interest rate at that bank is no longer competitive or you need the funds for other investments or activities, the automatic rollover may be an unwelcome surprise.
Certificates of deposit interest rates generally rise with the length of the CD term. A two year certificate of deposit will, during normal interest rate environments, generate a higher rate than a three month CD. CD interest rates will vary with the term of the CD as well as between the banks that offer CDs.
Before you purchase a new bank CD, make sure you fully understand the CD term and the penalties that may be imposed for early withdrawal. If you are considering a CD with an extended maturity date of a few years or longer, think carefully about the amount of funds you are allocating to the CD purchase. While the longer term bank CDs usually pay the highest CD rates, they also require investors to lock their money up for a longer period of time. Longer term CDs are less liquid by not allowing the investor access to the funds for a prolonged period of time without incurring a prepayment penalty as well the risk that market rates will increase while the CD awaits maturity.
For more information on the best CD rates by term refer to the following pages; 3 month CD rates, 6 month CD rates, 1 year CD rates, 2 year CD rates and 5 year CD rates.
State specific CD rates can be found at California CD Rates, Texas CD rates, New York CD rates, Florida CD Rates, Illinois CD Rates, Pennsylvania CD Rates, Ohio CD Rates, Michigan CD Rates as well as other states.
For more information on the today’s best rates on CDs see Best Rates on CDs.
Tags: bank CDs, CD interest rates, CD investments, CD maturity date, CD term, certificate of deposit, highest CD rates, one year CDs, six month CDs, three month CDs, two year CDs
No user commented in " Understanding the Certificate of Deposit Term "
Follow-up comment rss or Leave a TrackbackLeave A Reply