How Do CD Investments Work?


Quick Answer

A certificate of deposit (CD) investor promises to keep his or her cash on deposit with a financial institution for a specific period of time. A CD typically pays a higher rate of interest than a savings or a money market account.

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Full Answer

The term of a CD can vary from less than one month to several years. Longer-term CDs generally pay more interest than those with short maturities, but investors should keep in mind that an early withdrawal from a CD is normally subject to a financial penalty. When a CD reaches its maturity date, an investor can choose between allowing the CD to renew or redeeming the CD so that the funds can be used for another purpose.

CDs are among the safest of investments, and many of them are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. If a CD has this coverage, these government agencies make investors whole in the event of bank or credit union failure. This added safety means that the rates available on CDs are lower than riskier alternatives. CD investors usually seek a safe alternative for money that cannot be put at risk because they may use it in the near future.

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