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. Zero-Coupon Certificate Of Deposit (CD)

    A certificate of deposit (CD) that is purchased at a largely ...
  2. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
  3. Bull CD

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

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

    A certificate of deposit (CD) with a return based on a specific ...
  6. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...
RELATED FAQS
  1. What is considered a good interest rate for a certificate of deposit (CD)?

    Explore the various options available with certificates of deposit and discover how to find the most lucrative rates for ... Read Answer >>
  2. 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 >>
  3. How are yields taxed on a certificate of deposit (CD)?

    Learn how interest earned on a certificate of deposit is taxed and how this may reduce the total return of an investment ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. What is the difference between APR and APY?

    Learn about the difference between the calculations for APR and APY. APY takes into account the number of times that the ... Read Answer >>

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