1. Certificates Of Deposit: Introduction
  2. Certificates Of Deposit: Safety And More!
  3. Certificates Of Deposit: The Basic Model
  4. Certificates Of Deposit: Bells And Whistles (Part I)
  5. Certificates Of Deposit: Bells And Whistles (Part 2)
  6. Certificates Of Deposit: Maturity And Strategies
  7. Certificates Of Deposit: Details To Consider
  8. Certificates Of Deposit: Conclusion

Most investors consider a CD to be a safe, conservative place to hold assets. The assets don't just sit there, though. They earn interest in return. Traditional CDs typically yield returns greater than the rates offered by other insured investments, such as checking and savings accounts. Rates vary from CD to CD, but they are near the current rate of inflation, in general.

When comparing the interest rates of various CDs, it is important to understand the difference between annual percentage yield (APY) and annual percentage rate (APR). APY is the total amount of interest the CD will earn in one year, taking compound interest into account. APR is the stated interest earned in one year, without taking compounding into account. (To learn more, read APR Vs. APY: How The Distinction Affects You.)

Compounding involves the timing of interest calculation (or payment). A CD that pays interest only once a year will yield (in a year) only the exact amount of interest paid. When interest is paid several times a year, the yield total is the sum of the interest from each payment. Because the interest paid during the year earns interest in the account just as the original deposit does, compounded yield is greater than the yield for a once-a-year calculation.

For example, if Yuko purchases a one-year, $1,000 CD that pays 5% semiannually, she will receive an interest payment of $25 after the first six months ($1,000 x 5% x .5 year). The $25 payment begins earning interest of its own, which over the next six months amounts to $0.625 ($25 x 5% x .5 year). As a result, the yield is actually 5.06%, instead of 5% ,for a CD that pays 5% only once a year. The .06 may not seem like much at first, but compounding adds up as both the principal and interest continue to earn interest over time.

While traditional CDs are popular with investors, CDs are also available in a variety of configurations, offering a range of features and investment strategies. Read on to learn about the various models of this conservative place to stash your cash.

Certificates Of Deposit: The Basic Model

Related Articles
  1. Retirement

    Money Market: Certificate Of Deposit (CD)

    A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks but they can be bought through brokerages. They bear a specific maturity date (from three ...
  2. Personal Finance

    Are CDs Good Protection For The Bear Market?

    Certificates of deposit promise stable income in any market, but do they deliver?
  3. Personal Finance

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
  4. Personal Finance

    How To Create A Laddered CD Portfolio

    Laddered certificates of deposit offer safe capital and predictable cash flow, while bringing simplicity to your portfolio.
  5. Markets

    Getting Certificates of Deposit (CDs) in Emerging Markets: Risks and Rewards

    Learn about the risks and rewards associated with investing in a certificate of deposit (CD) offered by an emerging market and what to consider before buying.
  6. Managing Wealth

    CDs or Bonds: Which Investment is Better For You

    When choosing between CDs and bonds, investors who seek to maximize their returns but also want a large measure of safety should consider the following:
  7. Markets

    CDs Vs. Inflation: Are They Keeping Up?

    Learn how to determine whether the money invested in certificates of deposit (CDs) can keep pace with the rate of inflation and how you measure inflation.
  8. Trading

    Callable CDs: Check The Fine Print

    These offer higher returns than regular certificates of deposit, but there's a catch.
  9. Personal Finance

    Money Market vs. CDs: Which Is the Better Investment?

    Find out which short-term savings vehicle, a money market account or a certificate of deposit, is a better investment for your needs.
  10. Markets

    Savings Bonds Vs. CDs: Which Is Better in 2016?

    Understand what a savings bond is, what a CD is and what sets them apart from each other. Learn why a savings bond is the right investment for 2016.
Trading Center