What Are CD Rates, and How Do Banks Pay Them?


Quick Answer

CD rates are interest rates on certificates of deposit that are insured by the Federal Deposit Insurance Corporation and are sold by banks for defined periods of time, according to BankRate.com. When the CD is redeemed, the holder receives the initial investment plus accrued interest.

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Full Answer

If the CD is redeemed before its maturity date, the holder may pay a penalty as well as forfeit some of the interest that was earned. Strategies that can help individuals earn the most from CD rates include laddering, taking advantage of limited-time offers, buying CDs from online banks paying higher interest rates, purchasing rate-bump CDs, purchasing CDs that have low early withdrawal penalties and renewing CDs that have loyalty rewards in the form of a higher interest rate offered from the bank, according to Investopedia.com. CDs are considered a safe investment that usually pay better interest rates than many savings accounts, and can help individuals to keep up with inflation or even outpace it.

BankRate.com recommends doing due diligence when comparing CD rates online, as well as checking local banks and credit unions to see if there are special deals that are not being offered online. CDs can be purchased from brokerages as well as banks, and those CDs may pay a higher rate of interest but usually have a commission attached as well.

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