Certificate of Deposit

Certificate of Deposit - rates. For example, in mid-2004,...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
A certificate of Deposit (CD) is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured and thus virtually riskfree; they are "money in the bank". CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions. They are different from savings accounts in that the CD has a specific, fixed term (often monthly, three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest. In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: rates. For example, in mid-2004, interest rates were expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock market, the bond market, or other indices are introduced. A few general guidelines for interest rates are: A larger principal should receive a higher interest rate, but may not. A longer term will usually receive a higher interest rate, except in the case of an inverted yield curve (i.e. preceding a recession) Smaller institutions tend to offer higher interest rates than larger ones. Personal CD accounts generally receive higher interest rates than business CD accounts. Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates....
View Full Document

Ask a homework question - tutors are online