• Certificate of Deposit (CD)

    A certificate of Deposit (CD) is a deposit defined by specific time. The banks in the United States provide this financial product to their customers.

    Main characteristics of Certificate of Deposit (CD)

    • In US, It insured by a US Government Corporation.
    • These are generally held till the time it matures. At the end of the term, the money can be withdrawn along with the accrued dividend.
    • It is provided by various credit unions and thrift institutions also.
    • CDs are similar to Savings account in terms of insurance and Risk free.
    • CDs are different from Savings account asĀ  it has a definite precise term (normally 3 months, 6 months, 1 year up to 5 years) and It has a fixed Interest rate.

    Interest rate for CD

    • For higher deposited principal amount, the interest rate should also be high.
    • Higher deposit term leads to higher interest rate the interest rate should also be high.
    • Smaller finance institutions generally offer high interest rates when compared to the bigger ones to attract more customers
    • The interest rates of Personal Certificate of Deposit accounts are higher when compared to those of business CD accounts.
    • Banks offer high interest rates when their products are not insured by the Government Corporation to compensate extra risk in those investments.

    CD Ladder Strategy:

    Though an investment with longer term of deposit attracts a high interest, the deposited money is locked for a longer period of time. Such a scheme is not preferred in the increasing rate economy. In Ladder strategy, money is deposited for a longer term, in a way that a part of the amount matures every year.

    For example, a customer splits the money to be deposited in 3 CDs with term 3 year, 2 year and 1 year. At the end of one year, a CD matures and the customer reinvests it in a 3 year CD. The same cycle is followed in the second year. At the end of these 2 cycles, the depositor will have 3 CDs with term as 3 years. Hence the depositor gets the interest applicable for a 3-year CD, still having the benefit of one CD maturing every year.

    Ladder Strategy is not provided by any financial institution. The investor has to plan his investments to follow the ladder strategy.

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