Certificates Of Deposit: Safety And More!
  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

Certificates Of Deposit: Safety And More!

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

  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
RELATED TERMS
  1. Bull CD

    A certificate of deposit whose interest rate fluctuates in direct ...
  2. Bear CD

    A certificate of deposit whose interest rate fluctuates in inverse ...
  3. Index-Linked Certificate Of Deposit

    A certificate of deposit (CD) with a return based on a specific ...
  4. Callable Certificate Of Deposit

    An FDIC insured certificate of deposit (CD) that contains a call ...
  5. Fixed-Rate Certificate of Deposit

    A certificate of deposit (CD) which has a set interest rate to ...
  6. Yankee CD

    A certificate of deposit (CD) that is issued in the United States ...
RELATED FAQS
  1. How safe an investment is a certificate of deposit?

    Discover certificates of deposit, their basic makeup and numerous variations, and understand why they are some of the safest ... Read Answer >>
  2. What are the typical durations for a certificate of deposit?

    Investing in a certificate of deposit offers individuals the ability to earn interest on idle funds with less risk than stock ... Read Answer >>
  3. Other than my savings account, what other types of holdings compound my interest?

    Understand the benefits of compounding interest, and learn the types of investments that offer compounding in addition to ... Read Answer >>
  4. Are certificates of deposits different from money market demand deposits?

    What are the differences? ... Read Answer >>
  5. How often is interest compounded?

    Understand what compound interest is and how the compounding of interest applies to the benefit of investors or creditors, ... Read Answer >>
  6. What's the difference between an individual retirement account (IRA) and a certificate ...

    Both individual retirement accounts (IRA) and certificates of deposit (CD) are useful savings instruments, but they have ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center