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A certificate of deposit is a wise investment for your savings. This is basically a time deposit issued by commercial banks and can also be bought from brokers. The features of a certificate of deposit are that it has a fixed maturity date that can typically range from three months to five years. Similar to fixed deposits, the higher will be the interest rate for larger principal and longer maturity time. Certificates of deposit are available in any denomination. However, like other fixed time deposit, it is not possible to make any withdrawal of funds like in checking accounts. You can get a higher yield in certificates of deposit when compared to T-bills because of the higher default risk banks have.

When making a CD, it is important to find out some information of the CDs of different banks. Find out the minimum amount that has to be deposited and the length of maturity of the CD. The longer the length of the term, the greater is the yield. The interest you earn on the certificate of deposit depends on the amount of money you invest, the term of the certificate of deposit, the bank you choose and of course, the present interest rate of the financial market. Practically all banks offer CDs, so it is necessary to do some comparisons on interest rates before making an investment.

The main benefit of investing in certificates of deposit is the annual percentage yield it offers. Other investment sources offer annual percentage rate where you earn interest in a year, without any compound interest. However in a CD, the total amount of interest you earn in a year is defined by taking compound interest into account. In a certificate of deposit, the interest is calculated more frequently, to give a higher yield. So if other deposits earn interests once a year, the certificate of deposit earns interest at least twice a year. And when calculating interest for the second part of the year, the interest accrued in the first half is added to the principal, to give compound interest. This is the added advantage in investing in certificates of deposit.

Besides its better interest rates, another advantage of CDs is that it is relatively safer than any other investment choices. In a certificate of deposit, you will be aware of when you will be receiving interest, and when you will be withdrawing the amount. Basically, you earn more with a CD than in a savings account with the interest rate of the CD not fluctuating with the fluctuations of the stock markets.

However, like all other things, the CDs also have their shares of disadvantages. The first disadvantage is that in the long run, the returns you receive here are rather paltry when compared to other investment sources. Besides this, it is not possible to make a withdrawal on the money deposited until the completion of the CD. If it is absolutely necessary to make a withdrawal from the CD, it is possible only on the paying of a huge penalty.

Tags: CDs //