A Certificate of Deposit is a promissory note that is offered by a bank. CDs offer many attractive features such as:
- CDs have a maturity date, a specific fixed interest rate and are able to be issued in any denomination
- CDs are similar to savings accounts in that they are insured and risk-free, though you usually earn more from a CD
- Most CDs last from one month to five years and usually with a longer term you receive a higher rate. Similarly, the more money you invest, the higher the rate of return
- If you withdraw the funds before your CD matures, you can be hit with a penalty, so keep that in mind
When purchasing a CD, an essential concept to understand is APY (annual percentage yield). Let us look at it:
- APY does take compounding into account. The formula for APY would look like this: APY= (1 + Periodic Rate)#periods-1
Next time you are near a branch be sure to ask a Personal Banker about a Certificate of Deposit so you can decide if it is right for you!