What are the advantages and disadvantages of a certificate of deposit?


Quick Answer

A certificate of deposit is a relatively safe investment tool that allows a modest, predictable return. A primary drawback is that investing in a CD ties up the person's funds until the maturity date, according to About.com.

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Full Answer

The interest rates on CDs vary based on the length to maturity as well as the deposit amount. However, Bankrate reports national average yields just over 1 percent for one-year CDs as of December 2014. This yield is above the typical yield for a savings account. It is also possible for the investor to calculate the total return on the CD investment based on the time line and interest yield.

A caveat to the higher yield is that the bank gets to hold the money deposited until the yield date, according to About.com. This factor presents a challenge for someone who needs access to the funds for an emergency. If someone does decide to withdraw the money, a penalty is charged that negates interest yield earnings, reports Bankrate. Investing in a CD also ties up the funds so a person can't invest in other opportunities. If someone puts $5,000 into a three-year CD, for instance, that money isn't available if a higher-yield business or investment opportunity comes along during that time.

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