A certificate of deposit (CD) is a type of savings account that pays a set interest rate for a predetermined period or until the CD reaches maturity. It is similar to a savings account, but the main difference is that the money you deposit cannot be withdrawn until maturity unless you incur a penalty. CDs are one of the safest investments and are insured by the Federal Deposit Insurance Corporation (FDIC). While CDs can be used to pay for short-term and long-term purchases, their main use is savings. When you put money into a CD, you effectively lock in that interest rate for an extended period.
A CD rate is one of the most fundamental factors in deciding when to buy a certificate of deposit. A CD rate is what you earn on your investment, which can fluctuate based on the bank or credit union with which you choose to open an account. As with a savings account, this interest rate is also called the CD yield. At the end of the year or when you choose to withdraw your funds, you'll receive what you originally deposited at a fixed rate in the form of interest.
When you shop for a CD, you'll want to focus on finding the best CD rate. A CD rate is usually a fixed percentage of the total value of the CD. This means that if you deposit $100,000 into a 5-year CD, your interest rate will be 5% of $100,000, or $5,000. If the CD's interest rate is variable, it will change after a certain period. For example, it might increase by a few percentage points or decrease by a few percentage points each year.
CD rates are usually determined in several ways. Each bank and credit union has its method of calculating the interest rate for a particular CD. Some banks or credit unions will base the CD rate on a percentage of the Prime rate, while others will base their CD rates on Lender's Rate, the Federal Funds Rate, or an interest rate tied to the 30-year Treasury. If a bank or credit union has multiple CD rates available, the bank may combine them into one variable rate that adjusts every six months to achieve the best overall rate. The bank may also offer a fixed rate for the first six months and switch to a variable rate after that.
To find the best CD rates available, it's important to compare multiple CDs from different banks or credit unions. When researching the best CD rates, you should look at the different compounding periods for each account. CDs with shorter time frames will have higher interest rates because you will receive income more frequently. Most banks and credit unions offer CDs with maturities of three years or less. The longer the maturity, the lower the percentage you can expect to earn. The best CD rates have the shortest maturities and the highest interest rates.
CDs are safe investments because they have a higher level of security than some other types of investments. The Federal Deposit Insurance Corporation (FDIC) insures CDs through banks and credit unions so that your money will be safe if the bank or credit union fails. Since the FDIC insures CDs, they are considered a low-risk investment. In addition to being an FDIC-insured interest-bearing account, CDs also provide a fixed rate of return. There is no chance of losing money when investing in CDs.