Certificate Of Deposit (CD) CDs are issued by banks, credit unions, and other financial institutions and are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor, per institution.
CDs are popular among savers who want to earn a higher interest rate than a regular savings account and who do not need immediate access to their money. CDs typically require a minimum deposit amount and a minimum term length, which can range from a few months to several years. The longer the term and the larger the deposit, the higher the interest rate.
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How does a CD work?
When you open a CD, you agree to deposit a certain amount of money for a certain period of time, such as six months, one year, or five years. In exchange, the issuer pays you interest on your money at a fixed rate that is usually higher than a regular savings account. The interest rate and the term length are determined when you open the CD and cannot be changed unless you renew or roll over the CD at maturity.
You cannot withdraw your money from the CD before the maturity date without paying a penalty fee or forfeiting some or all of the interest earned. The penalty fee and the interest forfeiture vary depending on the issuer, the term length, and the amount withdrawn. Some CDs may have no penalty or a grace period for early withdrawal, but they usually have lower interest rates than CDs with penalties.
When your CD matures, you can redeem your money plus any interest earned. You can also choose to renew or roll over your CD for another term with the same or different terms and interest rates. Some CDs may automatically renew or roll over at maturity unless you instruct otherwise.
What are the Benefits of a CD?
CDs have some benefits that you should consider before opening one. Some of the benefits are:
- Higher interest rates: CDs usually offer higher interest rates than regular savings accounts as an incentive for locking up your money for a fixed period of time.
- Fixed returns: CDs offer fixed returns that are predictable and guaranteed. You know exactly how much interest you will earn and when you will receive it. The issuer cannot change the interest rate or the term length after you open the CD.
- Safety: CDs are considered to be one of the safest savings options. A CD bought through a federally insured bank or credit union is insured up to $250,000 per depositor, per institution. This means that even if the issuer fails, you will not lose your money.
What are the Drawbacks of a CD?
CDs have some drawbacks that you should consider before opening one. Some of the drawbacks are:
- Low liquidity: CDs have low liquidity, meaning that they cannot be easily withdrawn or transferred before the maturity date without paying a penalty fee or forfeiting some or all of the interest earned. This means that you cannot access your money in case of an emergency or an opportunity.
- Low flexibility: CDs have low flexibility, meaning that they cannot be adjusted or renegotiated if the market conditions or your needs change. For example, if interest rates rise after you open a CD, you cannot switch to a higher-paying CD without paying a penalty fee or forfeiting some or all of the interest earned.
- Inflation risk: CDs have inflation risk, meaning that they may lose their purchasing power over time if inflation grows faster than your interest rate. For example, if inflation is 3% per year and your CD pays 2% per year, your real return is -1% per year.
How Much Is A Certificate Of Deposit (CD): Types of CDs
There are different types of CDs that offer different features and benefits to savers. Some of the common types of CDs are:
Standard CD
This is the most basic type of CD that pays a fixed interest rate for a fixed term. The minimum deposit, term length, and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who want a predictable and guaranteed return and do not need access to their money before maturity.
Bump-up CD
This type of CD allows the saver to request a higher interest rate once during the term if the market rates rise. The initial interest rate is usually lower than a standard CD, and the term length and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who want to take advantage of rising rates without paying a penalty.
Step-up CD
This type of CD automatically increases the interest rate at predetermined intervals during the term. The initial interest rate is usually lower than a standard CD, and the term length and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who want to benefit from rising rates without having to request a bump-up.
No-penalty CD
This type of CD allows the saver to withdraw their money before maturity without paying a penalty fee or forfeiting any interest. The interest rate is usually lower than a standard CD, and the term length and minimum deposit vary depending on the issuer. This type of CD is suitable for savers who want more liquidity and flexibility than a standard CD.
Jumbo CD
This type of CD requires a large minimum deposit, usually $100,000 or more. The interest rate is usually higher than a standard CD, and the term length and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who have a large amount of money to invest and want to earn a higher return than a standard CD.
High-yield CD
This type of CD offers a higher interest rate than a standard CD, usually from online banks or credit unions. The minimum deposit, term length, and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who want to maximize their earnings and are willing to shop around for the best rates.
Zero-coupon CD
This type of CD does not pay any interest during the term, but instead pays a lump sum at maturity that includes the principal and the accrued interest. The minimum deposit, term length, and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who do not need any income from their investment and want to defer taxes on their interest until maturity.
Callable CD
This type of CD gives the issuer the right to redeem or “call” the CD before maturity at a specified price. The interest rate is usually higher than a standard CD, but the saver faces the risk of losing their investment before maturity if the issuer calls the CD. The minimum deposit, term length, call date, call price, and early withdrawal penalty vary depending on the issuer. This type of CD is suitable for savers who want to earn a higher return than a standard CD and are willing to take on more risk.
Brokered CD
This type of CD is sold by brokers or financial advisors rather than directly by banks or credit unions. The broker may offer CDs from different issuers with different features and rates. The minimum deposit, term length, interest rate, early withdrawal penalty, commission fee, and insurance coverage vary depending on the broker and the issuer. This type of CD is suitable for savers who want more variety and convenience than a standard CD and are willing to pay a commission fee.
Current CD rates are the annual percentage yields (APYs) that banks and credit unions offer to savers who open certificates of deposit (CDs). Current CD rates vary depending on the term of the CD, the amount of money deposited, and the market conditions. Current CD rates have been rising since 2022 due to the Federal Reserve’s decisions on interest rates and the economic recovery from the pandemic.
How Much Is A Certificate Of Deposit (CD)
Here are some of the current average APYs for CDs with different terms as of June 16, 2023:
| Term | APY |
|---|---|
| 1-year CD | 1.72% |
| 3-year CD | 1.37% |
| 5-year CD | 1.37% |
These are only averages and some banks and credit unions may offer higher or lower rates depending on their policies and promotions. For example, according to NerdWallet.com2, here are some of the highest APYs for CDs with different terms as of June 15, 2023:
| Bank/Institution | Term | APY | Minimum Deposit |
|---|---|---|---|
| Bread Savings | 1-year CD | 5.20% | $1,500 |
| BMO Alto | 1-year CD | 5.10% | $0 |
| Barclays Online | 1-year CD | 4.80% | $0 |
| Alliant Credit Union | 3-year CD | 4.45% | $1,000 |
| Marcus by Goldman Sachs | 3-year CD | 4.30% | $500 |
| BMO Alto | 3-year CD | 4.30% | $0 |
| Barclays Online | 3-year CD | 4.30% | $0 |
| Bread Savings | 5-year CD | 4.25% | $1,500 |
| Marcus by Goldman Sachs* | 5-year CD** | 4.75%*** | $500 |
| BMO Alto | 5-year CD | 4.30% | $0 |
*Promotional offer, expires Sept. 15, 2023 \n **Rate-bump CD \n ***Initial rate is lower but can be increased once during the term \n.
Alternatives to CDs
CDs are not the only option for savers who want to earn interest on their money. There are other alternatives that may offer higher returns, more liquidity, or more flexibility than CDs. However, these alternatives also come with different risks and trade-offs that savers should consider before investing. Some of the common alternatives to CDs are:
High-yield savings account
A high-yield savings account is a type of bank account that pays a higher interest rate than a regular savings account. High-yield savings accounts are usually offered by online banks or credit unions that have lower overhead costs than traditional banks. High-yield savings accounts have no maturity date and no penalty for early withdrawal, which makes them more liquid and flexible than CDs. However, high-yield savings accounts have variable interest rates that can change at any time depending on the market conditions. They also have transaction limits that restrict the number of withdrawals or transfers per month.
Money market account
A money market account is a type of bank account that pays a higher interest rate than a regular savings account and also provides check-writing privileges. Money market accounts are usually offered by banks or credit unions that invest in short-term securities such as Treasury bills or commercial paper. Money market accounts have no maturity date and no penalty for early withdrawal, which makes them more liquid and flexible than CDs. However, money market accounts have variable interest rates that can change at any time depending on the market conditions. They also have transaction limits that restrict the number of withdrawals or transfers per month.
Dividend-paying stocks
Dividend-paying stocks are shares of companies that distribute a portion of their profits to their shareholders on a regular basis. Dividend-paying stocks can provide a steady income stream and also appreciate in value over time. Dividend-paying stocks have no maturity date and no penalty for early withdrawal, which makes them more liquid and flexible than CDs. However, dividend-paying stocks have high volatility and risk that can result in losing some or all of the principal investment. They also have tax implications that depend on the type and amount of dividends received.
Bond funds
Bond funds are mutual funds or exchange-traded funds (ETFs) that invest in a portfolio of bonds with different maturities, issuers, and credit ratings. Bond funds can provide a diversified exposure to the bond market and also pay interest income to their investors. Bond funds have no maturity date and no penalty for early withdrawal, which makes them more liquid and flexible than CDs. However, bond funds have variable interest rates that can change at any time depending on the market conditions. They also have fees and expenses that reduce the net return on investment.
In conclusion, How Much Is A Certificate Of Deposit (CD) can be a useful tool for saving and growing your money, especially when you have a specific timeframe for your financial goals. By understanding the features, benefits, and considerations of CDs, you can make informed decisions and leverage their potential as part of your financial strategy.
Frequently Asked Questions on How Much Is A Certificate Of Deposit (CD) (F&Qs)
How much does it cost to have a CD?
The cost of a CD can vary depending on the type of CD, the brand, and the retailer. In general, blank CDs cost between $0.50 and $1.00 each, while pre-recorded CDs can cost anywhere from $10 to $20 or more.
Can you open a CD with $500?
Yes, you can open a CD with $500. Many banks and credit unions offer CDs with a minimum deposit of $500. Some banks may offer CDs with a lower minimum deposit, but it is important to shop around and compare rates before you open a CD.
How much does a CD payout?
The interest rate is the percentage of your deposit that you earn each year. The term of the CD is the length of time you agree to keep your money in the account. The amount of money you deposit is the amount of money you put into the CD.
For example, if you deposit $1,000 into a CD with a 3% interest rate and a 1-year term, you will earn $30 in interest after one year. If you deposit the same amount of money into a CD with a 5% interest rate and a 5-year term, you will earn $250 in interest after five years.
How Much Is A Certificate Of Deposit (CD)