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Bank CDs offer a safe and simple way to create financial security for the future, with a fixed interest rate based on current money market rates. Depositors can choose to renew, reinvest, or withdraw funds at maturity, but early withdrawal may result in severe penalties. Bank CD rates are often higher than savings account rates, making them an attractive option for conservative investors.
The bank CD, or certificate of deposit, is a simple but useful means of creating financial security for the future. As a money market instrument, the interest rate earned on a bank CD is based on current money market rates. Many people consider the bank certificate of deposit to be among the safest investment opportunities available today.
Setting up a bank CD involves depositing money into a special account with a banker. This deposit remains in the account until a predetermined maturity date is reached. In exchange for leaving the money in the CD account until maturity, the bank applies a specific or fixed interest rate to the deposited funds. It is possible to set up a bank CD with a duration of between one and five years.
In the event that the depositor decides to withdraw funds from the CD account before the maturity date is reached, most banks will impose severe penalties. The penalties are often enough to offset any returns that would have been made if the bank’s CD had remained in place until maturity. This process serves to encourage investors to leave the bank CD in place unless an emergency situation arises.
Once the expiration date is reached, investors have several options open to them. One option is to transfer the accrued interest to a checking or savings account and renew the CD for another period of time. The second approach is to reinvest both the principal and interest for another interest-bearing period. Finally, the investor can choose to receive both principal and accrued interest in cash or as a transfer of funds to an existing account. It’s important to note that taxes are generally due on funds generated by the bank’s CD and possibly principal as well, if that balance was used as a deduction in prior years.
Banks and investors alike can benefit from creating a bank CD rather than simply depositing the funds into a standard savings account. Because there is a maturity period that allows the bank to use those funds for an extended period of time, bank CD rates are often higher than the amount of interest that can be earned on a savings account. Banks receive a reasonable guarantee that the funds will remain in the bank’s possession for an extended period of time, while a depositor can withdraw funds from a savings account at any time.
For anyone who has a sum of money that won’t be needed for the foreseeable future and wants to earn a higher interest rate, a bank CD is a much better option than a savings account. While they don’t produce returns comparable to bonds or stock options, bank CD rates provide a decent return with much less risk. This makes the bank CD an attractive savings tool for people who are very conservative with their money.
Smart Asset.
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