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What Is A Certificate Of Deposit And How Does CDs Work

A certificate of deposit is a special type of financial product offered by financial institutions. In the world of investments, they are some of the most sought after financial products given the amount of returns they guarantee as long-term investments.

What is A Certificate of Deposit?

A certificate of difference is a special type of savings account offered by banks and credit unions that allow clients to lock funds for a specific period. The locked amount generates more returns than other savings accounts thanks to the power of compounding done on a much higher interest rate.

The lock-up status means you have to lock your amount for an agreed period. While it is still possible to withdraw money from the account before the maturity date, you will most likely pay the penalty for a breach of agreement.

Certificate of Deposit is a time deposit account for people who have long-term goals and do not require the invested capital immediately. The lock-up period usually ranges from 6 months to 18 months or several years.  A bank or credit union agrees to pay higher interest on a certificate of deposit on a client agreeing to lend them their money for a much longer period.

Certificate of Deposit Maturity Date

Certificate of deposit accounts matures at the end of the agreed term. Once the accounts mature, a bank will notify you and offer several options in return. You can decide to withdraw everything or reinvest into another CD with the same terms.

Read More: What is Leverage in Forex and How does Leverage Works In Forex Trading

Types of Certificate of Difference

Liquid or No penalty CDs

Liquid or No penalty CDs are a special type of Certificate of Deposit that allows clients to withdraw their money at any time without the risk of incurring a penalty. The flexibility makes it possible to move money from one CD to another, to take advantage of a higher interest when it arises. However, such accounts pay lower interest rates than normal CDs.

Bump-UP CDs

Bump-UP CDs are a special type of certificate deposit accounts that protect people from being stuck with a low interest account. Should interest rates increase, such accounts allow people to move their deposits to the high interest in paying CDs.  Just like Liquid CDs, they start by paying lower interest

Step-Up CDs

Step-Up CDs come with scheduled interest rate increases that ensure clients are not locked into one interest rate up to maturity date. Interest rate hikes, in this case, might come every six months.

Jumbo CDs

Jumbo CDs come with high minimum requirements for deposits. Usually, one must deposit more than $100,000 into the account. Unlike the other types of CDs, they come with a much higher interest rate.

Ruchi Gupta

Ruchi Gupta covers various beats from finance to technology and from lifestyle to hobbies. She has an MBA in Finance. Ruchi enjoys writing on celebrities and political news. She likes traveling and exploring places.

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