Posted on March 29, 2010.
How does a certificate of deposit (CDs) work? I am exploring the idea of opening a CD. I saw that many banks require a minimum deposit of $ 1,000 to do so.
How does it work then? If I open one month to 12 CDs with the minimum of $ 1,000 and the interest rate is 4.25%, what I'm looking at all financially?
What are the advantages of doing so, and there falls?
You deposit a certain amount of money in the bank and earn interest rates offered in your case, 4.25%. At the end of 12 months, you earn about $ 42.50 profit =. (The money earned is added months, however, not per year).
The disadvantage is that you can not use any part of this money during the entire 12 months Agreement. If you need to access them, you do it with a penalty.
Another drawback is that interest rates may change in the economy during your investment. Say you put your money in a 5-year CD at 4.25%, which is currently in the middle. Then we get a big boost economy, and the average interest rate is 8%! But you're locked into the agreement, if you still want to be stuck at the rate of 4.25%.
Some CDs are for a short period of time. I made CD with 4 months, 6 months, and the terms of 9 months. So in general, CDs are pleasant and safe, but look around those who offer rates percentage points higher and shorter.
Excellent answer. I am new to investing and you put your reply in very simple terms that many writers have financial difficulty in doing so.
Thank you Report Abuse
Your certificate of deposit at the bank shows that you are depositing funds to them for a specified period. In your example, the bank knows it can use your money for a year before they pay you with interest accrued. They like to have that guarantee, which is why the interest paid is higher than a savings or checking account. The positive side is the higher interest rates, and the fact that a CD produced a guaranteed income for you. The disadvantage is that the funds are fully accessible without having to pay a penalty. A standard penalty is 90 days interest. If you are looking for a CD that pays 4.25% for one year, with a minimum deposit of 1000, so I say keep looking. Many banks in my area pay 4.75-5.5% for the CD about a year with a minimum deposit much lower.
