CERTIFICATE OF DEPOSITS

This scheme was introduced in July 1989, to enable the banking system to mobilise bulk deposits
from the market, which they can have at competitive rates of interest.
The major features are:
Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions
within their `Umbrella limit’.
CRR/SLR Applicable on the issue price in case of banks
Investors Individuals (other than minors), corporations, companies, trusts, funds, associations
etc
Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years).
Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac
Intt. rate Market related. Fixed or floating
Loan Against collateral of CD not permitted
Pre-mature cancellation Not allowed
Transfer Endorsement & delivery. Any time
Nature Usance Promissory note. Can be issued in Dematerialisation form only only wef June
30, 2002
Other conditions
• If payment day is holiday, to be paid on next preceding business day
• Issued at a discount to face value
• Duplicate can be issued after giving a public notice & obtaining indemnity

FOR MORE

Certificate of deposits(CD) are short term deposit instruments issued by banks and financial
institutions to raise large sums of money.

Features of Certificate Of Deposit

• Document of title to time deposit.

• Unsecured negotiable promotes.
• Freely transferable by endorsement and delivery.
• Issued at discount to face value.
• Repayable on a fixed date without grace days.
• Subject to stamp duty like the usince promissory notes.

The banks in USA in 1960s introduced CDs which are freely negotiable and marketable any time
before maturity. The CDs were issued by big banks in the USA of $1 million at face value
bearing fixed interest with a maturity generally ranging from 1 to 6 months. Banks sold CDs
direct to investors or through dealers who subsequently traded this instrument in secondary
market. The American banks issued for the first time dollar CDs in London in 1966. The bank of
England gave permission to around 40 banks to make CD issue.

The feasibility of introducing CDs in India was examined by the Tamb Working Group in 1982
which did not, however, favour the introduction of this instrument. The matter was again studied
in 1987 by the Vaghul Working Group on the Money Market. The Vaghul Group recognized that
CP world be attractive both the banker and investor in that the bank is not required to encase the
deposit prematurely while the investor can liquefy the instrument before its maturity in the
secondary market.
On the recommendations of the Vaghul Committee, the RBI formulated a scheme in June 1989
permitting scheduled commercial banks (excluding RRBs) to issue CDs. It terms of the scheme,
CDs can be issued by scheduled commercial banks at discount on face value and the discount
rates are market-determined. The RBI has issued detailed guidelines for the issue of CDs and ,
with the changes introduced subsequently, the scheme for CDs has been liberalized.

RBI Guidelines

1. The denomination of CDs could be in multiples of Rs. 5 lakh subject to a minimum size
of an issue to a single investor being Rs. 25 lakh. The CDs above Rs.25lakh will be in
multiples of Rs.5 lakh. The amount rates to face value (not mortuary value) of CDs
issued.
2. The CDs are short-term deposit instruments with maturity period ranging from 3 months
to one year. The banks can issues at their discretion the CDs for any member of months/
days beyond the minimum usince period of three months and within the maximum usince
of one year.
3. CDs can be issued to individuals, corporations, companies, trust funds, associations, etc.
non-resident Indians (NRIs) can also subscribe to CDs but only on a non-repatriation.
4. CDs are freely transferable by endorsement and delivery but only after 45 days of the
date of issue the primary investor. As such, the maturity period of CDs available in the
market can be anywhere between 1 day and 320 days.
5. They are issued in the form of usince promissory notes payable on a fixed date without
days of grace. CDs are subject to payment of stamp duty like the usince promissory
notes.
6. Banks have to maintain CRR and SLR on the issue price of CDs and report them as
deposits to the RBI. Banks are neither permitted to grant loans against CDs nor to buy
them back prematurely.
7. From October 17, 1992, the limit for issue of CDs by scheduled commercial banks
(excluding Regional Rural Banks) has been raised from 7 per cent to 10 per cent of the
fortnightly aggregate deposits in 1989 – 90. The ceiling on outstanding of CDs at any
point of time are prescribed by the Reserve Bank of India for each bank. Banks are
advised by the RBI to ensure that the individual bank wise limits prescribed for issue of
CDs are not exceeded at any time.

At present the total permissible limits for issue of certificates of deposits (CDs). By the baking
system amounts to Rs. 15,038 crore equivalent to 10 per cent of the fortnightly average
outstanding aggregate deposits in 1989 – 90. The outstanding amount of CD issued by 50
scheduled commercial banks as on February 5,1998 amounted to Rs.10,261 crore and formed
70.4 per cent of the limit set for these banks for issue of CDs. To enable banks to mobilize
deposits on comparative terms id has been decided to enhance the limits for issue of CDs .
Accordingly, with effect from April17m 1993 scheduled commercial banks (excluding Regional
Rural Banks) can issue CDs equivalent to 10 per cent of the fortnightly average outstanding
aggregate deposits inn 1991 – 92. Consequently the aggregate limits for issue of CDs by eligible
banks would increase from Rs. 15,038 crore of Rs. 20,552 crore. There financial instruments,
viz, industrial development banks in India, industrial credit and investment corporation of India
and industrial finance corporation of India, were permitted to issue CDs with a maturity
aggregate limit of Rs. 100 crore (enhanced to Rs. 1,350 crore in May 1992) . effective from July
29, 1992 the industrial reconstruction Bank of India has also been permitted by issue CDs upto a
limit of Rs. 100 crore.

Advantages of Certificate of Deposits

1. Certificate of deposits are the most convenient instruments to depositors as they enabler
their short term surpluses to earn higher return.
2. CDs also offer maximum liquidity as the are transferable by endorsement and delivery.
The holder can resell his certificate to another.
3. From the point of view of issuing bank,, it is vehicle to raise resource in times of need
and improve their lending capacity. The CDs are fixed term deposits which cannot be
withdrawn until the redemption date.
4. This is an ideal instrument for the banks with short term surplus found to invest at
attractive.

Certificate Of Deposit - CD

What Does Certificate Of Deposit - CD Mean?

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate
and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC.
The term of a CD generally ranges from one month to five years.

Investopedia explains Certificate Of Deposit - CD

A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from
withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a
penalty.

For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term
of one year. At year's end, the CD will have grown to $10,500 ($10,000 * 1.05).

CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo
CDs". Almost all large CDs, as well as some small CDs, are negotiable.
Certificate of deposit
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v•d•e

A certificate of deposit, USA, 1932

This article is specific to the United States. For a more general article, see Time deposit.

A certificate of deposit or CD is a time deposit, a financial product commonly offered to

consumers by banks, thrift institutions, and credit unions.

CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are
"money in the bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions).
They are different from savings accounts in that the CD has a specific, fixed term (often 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 rates. For example, in mid-2004,
with interest rates 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.

Contents
[hide]

• 1 How CDs work

o 1.1 Interest Payout
o 1.2 Closing a CD
o 1.3 CD refinance
o 1.4 Ladders
• 2 Deposit insurance
• 3 Terms and conditions
• 4 Other similar products
o 4.1 Callable CDs
o 4.2 Brokered CDs
o 4.3 Bump Up CDs
o 4.4 Liquid CDs
o 4.5 Step Up CD or Step Down CDs
o 4.6 Variable Rate CDs
o 4.7 Add On CDs
o 4.8 Zero Coupon CD
• 5 Criticism
• 6 References
 • 7 External links

[edit] How CDs work

CDs typically require a minimum deposit, and may offer higher rates for larger deposits. In the
US, the best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000.
However there are also institutions that do the opposite and offer lower rates for their "Jumbo
CDs". The consumer who opens a CD may receive a passbook or paper certificate, it now is
common for a CD to consist simply of a book entry and an item shown in the consumer's
periodic bank statements; that is, there is usually no "certificate" as such.

[edit] Interest Payout

At most institutions, the CD purchaser can arrange to have the interest periodically mailed as a
check or transferred into a checking or savings account. This reduces total yield because there is
no compounding. Some institutions allow the customer to select this option only at the time the
CD is opened.

[edit] Closing a CD

Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this
is often the loss of six months' interest. These penalties ensure that it is generally not in a holder's
best interest to withdraw the money before maturity—unless the holder has another investment
with significantly higher return or has a serious need for the money.

Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting
directions. The notice usually offers the choice of withdrawing the principal and accumulated
interest or "rolling it over" (depositing it into a new CD). Generally, a "window" is allowed after
maturity where the CD holder can cash in the CD without penalty. In the absence of such
directions, it is common for the institution to roll over the CD automatically, once again tying up
the money for a period of time (though the CD holder may be able to specify at the time the CD
is opened not to roll over the CD).

[edit] CD refinance

In the U.S. insured CDs are required by the Truth in Savings Regulation DD to state at the time
of account opening the penalty for early withdrawal. These penalties cannot be revised by the
depository prior to maturity. The penalty for early withdrawal is the deterrent to allowing
depositors to take advantage of subsequent enhanced investment opportunities during the term of
the CD. In rising interest rate environments the penalty may be insufficient to discourage
depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable
early withdrawal penalty. The added interest from the new higher yielding CD may more than
offset the cost of the early withdrawal penalty.
[edit] Ladders

While longer investment terms yield higher interest rates, longer terms also may result in a loss
of opportunity to lock in higher interest rates in a rising-rate economy. A common mitigation
strategy for this opportunity cost is the "CD ladder" strategy. In the ladder strategies, the investor
distributes the deposits over a period of several years with the goal of having all one's money
deposited at the longest term (and therefore the higher rate), but in a way that part of it matures
annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining
the option to re-invest or withdraw the money in shorter-term intervals.

For example, an investor beginning a three-year ladder strategy would start by depositing equal
amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From this point on, a CD
will reach maturity every year, at which time the investor would re-invest at a 3-year term. After
two years of this cycle, the investor would have all money deposited at a three-year rate, yet have
one-third of the deposits mature every year (which can then be reinvested, augmented, or
withdrawn).

The responsibility for maintaining the ladder falls on the depositor, not the financial institution.
Because the ladder does not depend on the financial institution, depositors are free to distribute a
ladder strategy across more than one bank, which can be advantageous as smaller banks may not
offer the longer terms found at some larger banks. Although laddering is most common with
CDs, this strategy may be employed on any time deposit account with similar terms.

[edit] Deposit insurance

In the US, the amount of insurance coverage varies depending on how accounts for an individual
or family are structured at the institution. The level of insurance is governed by complex FDIC
and NCUA rules, available in FDIC and NCUA booklets or online. The standard insurance
coverage is currently $250,000 per owner or depositor for single accounts or $250,000 per co-
owner for joint accounts until December 31, 2013. On January 1, 2014, the standard coverage
limit will return to $100,000 per depositor for all accounts except for certain retirement accounts,
which will remain at $250,000 per depositor.[1]

Some institutions use a private insurance company instead of, or in addition to, the Federally
backed FDIC or NCUA deposit insurance. Institutions often stop using private supplemental
insurance when they find that few customers have a high enough balance level to justify the
additional cost.

The Certificate of Deposit Account Registry Service program allows investors to keep up to $50
million invested in CDs managed through one bank with full FDIC insurance [2]. However rates
will likely not be the highest available.

[edit] Terms and conditions

There are many variations in the terms and conditions for CDs.
In the US, the federally required "Truth in Savings" booklet, or other disclosure document that
gives the terms of the CD, must be made available before the purchase. Employees of the
institution are generally not familiar with this information; only the written document carries
legal weight. If the original issuing institution has merged with another institution, or if the CD is
closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the
terms and conditions document to ensure that the withdrawal is processed following the original
terms of the contract.

• The CD may be callable. The terms may state that the bank or credit union can close the
CD before the term ends.
• Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the
CD.
• Interest calculation. The CD may start earning interest from the date of deposit or from
the start of the next month or quarter.
• Right to delay withdrawals. Institutions generally have the right to delay withdrawals
for a specified period to stop a bank run.
• Withdrawal of principal. May be at the discretion of the financial institution.
Withdrawal of principal below a certain minimum—or any withdrawal of principal at all
—may require closure of the entire CD. A US Individual Retirement Account CD may
allow withdrawal of IRA Required Minimum Distributions without a withdrawal penalty.
• Withdrawal of interest. May be limited to the most recent interest payment or allow for
withdrawal of accumulated total interest since the CD was opened. Interest may be
calculated to date of withdrawal or through the end of the last month or last quarter.
• Penalty for early withdrawal. May be measured in months of interest, may be
calculated to be equal to the institution's current cost of replacing the money, or may use
another formula. May or may not reduce the principal—for example, if principal is
withdrawn three months after opening a CD with a six-month penalty.
• Fees. A fee may be specified for withdrawal or closure or for providing a certified check.
• Automatic renewal. The institution may or may not commit to sending a notice before
automatic rollover at CD maturity. The institution may specify a grace period before
automatically rolling over the CD to a new CD at maturity. Be careful as some otherwise
respectable banks have been known to renew at scandalously low rates. [3].

[edit] Other similar products

This section does not cite any references or sources.
Please help improve this article by adding citations to reliable sources. Unsourced material may be
challenged and removed. (March 2009)

This article has described the familiar FDIC-insured or NCUA-insured CDs which are usually
purchased by consumers directly from banks or credit unions. There are also "certificates of
deposit" issued by various entities that do not carry insurance.

[edit] Callable CDs

A callable CD is similar to a traditional CD, except that the bank reserves the right to "call" the
investment. After the initial non-callable period, the bank can buy (call) back the CD. Callable
CDs pay a premium interest rate. Banks manage their interest rate risk by selling callable CDs.
On the call date, the banks determine if it is cheaper to replace the investment or leave it
outstanding. This is similar to refinancing a mortgage.

[edit] Brokered CDs

Many brokerage firms – known as "deposit brokers" – offer CDs. These brokerage firms can
sometimes negotiate a higher rate of interest for a CD by promising to bring a certain number of
deposits to the institution.

Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated
investors. Instead of owning the entire CD, each investor owns a piece. If several investors own
the CD, the deposit broker may not list each person's name in the title but the account records
should reflect that the broker is merely acting as an agent (e.g., "XYZ Brokerage as Custodian
for Customers"). This ensures that each portion of the CD qualifies for up to $100,000 of FDIC
coverage.

In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty
for early withdrawal. In those cases, the deposit broker will instead try to resell the CD if the
investor wants to redeem it before maturity. If interest rates have fallen since the CD was
purchased, and demand is high, he/she may be able to sell the CD for a profit. But if interest rates
have risen, there may be less demand for such lower-yielding CD, which means that he/she may
have to sell the CD at a discount and lose some of the investor’s original deposit.

Deposit brokers do not have to go through any licensing or certification procedures, and no state
or federal agency licenses, examines, or approves them.

In the event of bank failure, FDIC insurance applies but may be more difficult to realize. Direct
deposit CDs are often allowed to mature at the original rate by the acquiring bank, but brokered
accounts usually stop paying interest immediately. Brokered depositors may not be timely
notified. Further, the FDIC will pay claims on direct deposits within 7-10 days, brokered CD
claims may take 30-60 days. Additionally, the FDIC may require that brokered depositors prove
they do not hold simultaneous direct and brokered deposits which exceed FDIC limits.

[edit] Bump Up CDs

A Bump Up CD allows the account holder the option to increase the interest rate once during the
term of the CD. Upon request, the bank will “bump up” the interest rate on the certificate of
deposit to a higher rate being offered by the issuing bank on that CD (or a comparable term CD).
The rate change does not change the original maturity date of the CD.

[edit] Liquid CDs

This type of CD is generally a fixed rate certificate of deposit, which allows you to withdraw a
portion of the original deposit during the term without paying a penalty. There will be some
limits on when you can take the money out, the amount that can be withdrawn and how many
separate withdrawals you can make from the CD.

[edit] Step Up CD or Step Down CDs

These can also be called a flex CD and can be confused with a Bump Up CD. Certificates of
deposit with a step up or down feature have a fixed interest rate for a period of time, usually one
year and then the interest rate automatically rises up to a predetermined rate or is lowered to a
predetermined rate.

[edit] Variable Rate CDs

Unlike traditional CD's that pay a fixed rate of interest, a variable rate CD or index based CD is
tied to the outcome of a market index. The interest you earn at maturity is based on the
percentage gain (or loss) from the Initial Index to the final Index value.

These certificates of deposit can be tied to a bond or stock index or a reference rate like the
Treasury bills, Prime Rate or the Consumer Price Index.

[edit] Add On CDs

These are fixed or variable rate CDs to which you can make additional deposits. There can be
restrictions, such as a minimum deposit that can be made to the account.,

[edit] Zero Coupon CD

These certificates of deposit are issued at a substantial discount from the face amount of the CD.
Typically the maturity terms are much longer, 15 to 20 years, which results in the discounted
price. Zero coupon CDs do not pay interest until the maturity date.

[edit] Criticism
CD interest rates closely track inflation.[4] For example, in one situation interest rates may be
15% and inflation may be 15%, and in another situation interest rates may be 2% and inflation
may be 2%. Of course, these factors cancel out, so the real interest rate is the same in both cases.

In this situation, it is a misinterpretation that the interest is an increase in value. However, to

keep the same value the rate of withdrawal must be the same as the real rate of return, in this
case, zero. People may also think that the higher-rate situation is "better," when the real rate of
return is actually the same.
Also, the above does not include taxes.[5] When taxes are considered, the higher-rate situation
above is worse, with a lower (more negative) real return, although the before-tax real rates of
return are identical. The after-inflation, after-tax return is what's important.

Ric Edelman writes, "You don't make any money in bank accounts (in real economic terms),
simply because you're not supposed to."[6]; on the other hand, bank accounts and CDs are fine for
holding cash for a short amount of time.

However Mr. Edelman's opinions may apply only to "average" CD interest rates. In reality, some
banks pay much lower than average rates while others pay much higher rates (differences of
100% are not unusual, eg, 2.50% vs 5.00%).[7] In the United States, depositors can take
advantage of the best FDIC-insured rates without increasing their risk.[8] Furthermore, a long-
term CD might have a high nominal interest rate with a relatively low real interest rate due to
high inflation at the time of purchase (as indicated above); however inflation rates often change
rapidly and the final real interest rate could be significantly higher than riskier investments.[9]

Finally, Mr. Edelman's statement that "CD interest rates closely track inflation" is not necessarily
true. For example, during a credit crunch banks are in dire need of funds and CD interest rate
increases may not track inflation.[10]

[edit] References
1. ^ "FDIC: Deposit Insurance Summary".
http://www.fdic.gov/deposit/deposits/dis/index.html.
2. ^ "CDARS". http://www.cdars.com/.
3. ^ Major Bank Certificate of Deposit Renewal Rate Rip-Off "Rip Off".
http://www.lieffcabraser.com/cd-renewal.htm.
4. ^ Ric Edelman, The Truth About Money, 3rd ed., p. 31
5. ^ Ric Edelman, The Truth About Money, 3rd ed., p. 30
6. ^ Ric Edelman, The Truth About Money, 3rd ed., p. 61
7. ^ Compare a typical large-bank 1-year CD, eg, "Wells Fargo". http://wellsfargo.com. vs
the highest 1-year CD available at a listing service, eg, "BankCD.com".
http://bankcd.com.
8. ^ "FDIC: Insuring Your Deposits".
http://www.fdic.gov/deposit/deposits/insuringdeposits/index.html.
9. ^ Eg, in 1981 the inflation rate was 10.3%, which subsequently decreased"US
Department of Labor's CPI". ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt. while
CDs where paying double digit rates "Federal Reserve's CD rates".
http://www.federalreserve.gov/releases/h15/data/Annual/H15_CD_M6.txt. Whoever
purchased long-term CDs at that time enjoyed high real interest rates during the
following years.
10. ^ Goldwasser, Joan. "Upside of the Credit Crunch". The Washington Post.
http://www.washingtonpost.com/wp-
dyn/content/article/2008/09/10/AR2008091000943.html. Retrieved April 28, 2010.
[edit] External links
• The US SEC on buying CDs
• North American Securities Administrators Association on buying CDs.
• 2007 US Department of Justice filing "...a scheme to defraud investors, many of them
elderly, of approximately $3,661,248 by selling the investors fraudulent certificates of
deposit."

Retrieved from "http://en.wikipedia.org/wiki/Certificate_of_deposit"

Categories: Banking | Retail financial services | Interest bearing instruments
Hidden categories: Articles needing additional references from March 2009 | All articles needing
additional references

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 •

Money Market: Certificate Of Deposit (CD)

Printer friendly version (PDF format)

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 months to five years), a specified
interest rate, and can be issued in any denomination, much like bonds. Like all time deposits, the funds may not be
withdrawn on demand like those in a checking account.

CDs offer a slightly higher yield than T-Bills because of the slightly higher default risk for a bank but, overall, the
likelihood that a large bank will go broke is pretty slim. Of course, the amount of interest you earn depends on a
number of other factors such as the current interest rate environment, how much money you invest, the length of time
and the particular bank you choose. While nearly every bank offers CDs, the rates are rarely competitive, so it's
important to shop around.

A fundamental concept to understand when buying a CD is the difference between annual percentage yield (APY)
and annual percentage rate (APR). APY is the total amount of interest you earn in one year, taking compound
interest into account. APR is simply the stated interest you earn in one year, without taking compounding into
account. (To learn more, read APR vs. APY: How The Distinction Affects You.)

The difference results from when interest is paid. The more frequently interest is calculated, the greater the yield will
be. When an investment pays interest annually, its rate and yield are the same. But when interest is paid more
frequently, the yield gets higher. For example, say you purchase a one-year, $1,000 CD that pays 5% semi-annually.
After six months, you'll receive an interest payment of $25 ($1,000 x 5 % x .5 years). Here's where the magic of
compounding starts. The $25 payment starts earning interest of its own, which over the next six months amounts to $
0.625 ($25 x 5% x .5 years). As a result, the rate on the CD is 5%, but its yield is 5.06. It may not sound like a lot, but
compounding adds up over time.

The main advantage of CDs is their relative safety and the ability to know your return ahead of time. You'll generally
earn more than in a savings account, and you won't be at the mercy of the stock market. Plus, in the U.S. the Federal
Deposit Insurance Corporation guarantees your investment up to $100,000.

Despite the benefits, there are two main disadvantages to CDs. First of all, the returns are paltry compared to many
other investments. Furthermore, your money is tied up for the length of the CD and you won't be able to get it
out without paying a harsh penalty.
 Certificate of Deposit (CD)
A certificate of deposit (CD) is a fixed-deposit investment option offered by banks and lending
institutions. It offers higher interest rates than conventional savings accounts because it requires
investors to deposit funds for a specified term ranging from one month to more than five years. However, like savings
accounts, CDs are a secure form of investment, as they are insured by government agencies. In the US, CDs issued by
banks and worth up to $100,000 are insured by Federal Deposit Insurance Corporation (FDIC).

How Certificates of Deposit (CD) Work?

A person can buy a certificate of deposit (CD) by depositing the minimum requisite amount. In general, the higher the
deposited amount, the better will be the interest rate offered on it. The buyer of a CD receives a written declaration or
certificate where the applicable interest rate, term of deposit and date of maturity are stated.

At the time of maturity, buyers are entitled to receive the principle amount and the interest earned. In order to encourage
buyers to maintain their long-term investment, banking institutions levy heavy penalties on the early withdrawal of the
amount deposited in a CD. The penalty can be in the form of either the interest earned over six months or an overall
reduction in the interest rate.

Banking institutions have introduced a ladder CD, which provides investors the flexibility of receiving the principal amount
in installments. This enables people to invest money in other high-interest alternatives.

Tips to Buying a Certificate of Deposit

(CD)
The following tips can help you decide on a certificate of deposit:

• Consider your financial goals: The basic recipe for a successful investment is a clear vision of your financial target
and risk appetite. Apart from CDs, there are various options for diversifying your investment portfolio, such as saving
deposits and treasury bills. Consider all available options before making a decision. Typically, CDs offer a fixed interest
rate for the entire term of the investment. Thus, the biggest risk factor in opting for a CD is inflation, which can erode
the purchasing power of the total returns from this investment option.
• Consider the maturity time: You money will be locked till the CD matures. So, ensure that you do not need the
funds.
• Consider the rate of interest: Confirm whether the CD offers a simple or a compounded rate of interest. In case it
is a compounded rate, find out whether it is compounded quarterly or annually.
• Check whether the CD is callable: Banking institutions reserve the right to call a CD, if the prevailing interest
rates are at record low levels. In such a situation, you will receive the entire principal amount in addition to the interest
accrued till the CD is called off. To continue your investment, you would have to buy a new CD at the lower interest
rate.
• Confirm the penalty for early withdrawal: Make sure you understand the penalty levied by the issuing bank for
withdrawing your funds prior to the maturity period.

Before buying the CD, it is important to carefully read all the terms and conditions of the investment. Remember to ask
questions from the issuing bank and check the answers with an unbiased source.

Find out the pros and cons of Investing in Certificate of Deposit.

Investors searching for relatively low-risk investments often turn to certificates of deposit (CDs).
A CD is a special type of deposit account with a bank or thrift institution that typically offers a
higher rate of interest than a regular savings account. Unlike other investments, CDs feature
federal deposit insurance up to $250,000.

Here’s how CDs work: When you purchase a CD, you invest a fixed sum of money for a fixed
period of time – six months, one year, five years, or more – and, in exchange, the issuing bank
pays you interest, typically at regular intervals. When you cash in or redeem your CD at
maturity, you receive the money you originally invested plus any accrued interest. But if you
redeem your CD before it matures, you may have to pay an "early withdrawal" penalty or forfeit
a portion of the interest you earned.

Although most investors have traditionally purchased CDs through local banks, many brokerage
firms now offer CDs. These brokerage firms – both traditional stock brokerage firms and those
firms specializing in the sale of CDs, known as "deposit brokers" – can sometimes negotiate a
higher rate of interest for a CD by promising to bring a certain amount of deposits to the FDIC-
insured institution issuing the CDs. The deposit broker can then offer these "brokered CDs" to
their customers.

At one time, most CDs paid a fixed interest rate until they reached maturity. But, like many other
products in today’s markets, CDs have become more complicated. Investors may now choose
among variable rate CDs, long-term CDs, and CDs with special redemption features in the event
the owner dies.

Some long-term, high-yield CDs have "call" features, meaning that the issuing bank may choose
to terminate – or call – the CD after only one year or some other fixed period of time. Only the
issuing bank may call a CD, not the investor. For example, a bank might decide to call its high-
yield CDs if interest rates fall. But if you’ve invested in a long-term CD and interest rates
subsequently rise, you’ll be locked in at the lower rate.

Before you consider purchasing a CD from your bank or brokerage firm, make sure you fully
understand all of its terms. Carefully read the disclosure statements, including any fine print.
And don’t be dazzled by high yields. Ask questions – and demand answers – before you invest.
These tips can help you assess what features make sense for you:

Beware of an Advertised CD Rate Far Above the Competition – First, it could be a product
issued by a company that is not federally insured and second, it could be a marketing ploy. In
either case any money invested could be at risk. A company may advertise in the local
newspaper a 5.0 percent interest rate for a six-month bank CD for consumers to invest. When a
customer calls, he or she is told to come to the office to discuss the details. It turns out that the
bank is paying only 5 percent on the first $1,000 — not 5.0 percent on any balance. Another
situation to beware of occurs when the customer is informed that the bank will pay only 2.5
percent but the sales person for the company offers to add enough money to the CD purchase to
make up the interest rate difference. When the CD matures, there is no similar offer on a new CD
and the individual can be steered into purchasing a non-insured investment that may be a poor
choice for the consumer but very lucrative for the sellers.
Be Careful When “Laddering” Your CD Purchases Over Different Time Periods – Say you
have $100,000 to invest and you would like to maximize your earnings but you are hesitant
about investing long term. Instead of putting it all into a five-year CD just to get a high, long-
term interest rate, you could place $20,000 in a CD that matures in a year, $20,000 in a CD that
matures in two years, and so on, which means you will have a CD maturing every year for five
years. If you follow the strategy, you will roll each maturing CD into a new 5-year CD. The
concern comes if you need to access most of your deposit where you will have to pay an early
withdrawal penalty.

Find Out When the CD Matures – As simple as this sounds, many investors fail to confirm the
maturity dates for their CDs and are later shocked to learn that they have tied up their money for
five, ten, or even twenty years. Before you purchase a CD, ask to see the maturity date in
writing. Also, find out if the CD will automatically renew at maturity if you do not withdraw the
money. If that is the case, find out if the automatic renewal will be at the "old" interest rate or the
current rate at the time of the renewal. If market rates have increased, it is not to your benefit to
renew at the old rate.

For Brokered CDs, Identify the Issuer – Because federal deposit insurance is limited to a total
aggregate amount of $250,000 for each depositor in each bank or thrift institution, it is very
important that you know which bank or thrift issued your CD. In other words, find out where the
deposit broker plans to deposit your money. Not all companies with bank-sounding names are
actually banks or are insured by the FDIC. That is why you should verify that the institution is
FDIC-insured. You can use our Bank Find service at www2.fdic.gov/idasp/main_bankfind.asp or
by calling the FDIC toll-free at 1(877) 275-3342; for the hearing impaired call 1(800) 925-4618
(8 a.m. to 8 p.m. Eastern Time, Monday through Friday).

You will also want to know if the agent plans to put your money into a bank where you already
have deposits. If the institution fails, the FDIC will determine your insurance coverage by adding
together the accounts opened by the agent and the account you opened directly with the bank.
And if the combination of the agent-placed deposits and your existing accounts could push your
total deposits over the current $250,000 federal insurance limit per bank, you should know that
in advance, so you can take action to avoid having uninsured funds at that bank.

In addition, be sure to ask what record-keeping procedures the deposit broker has in place to
assure your CD will have federal deposit insurance. You should also ask your agent whether the
FDIC’s requirements for the titling of deposit accounts placed by agents will be met. For
example, if the account is titled in the name of the agent, and not in your name, you want the
account records to indicate that the money is held by the agent on behalf of others, and that the
records maintained by the bank or the agent identify the actual owner or owners of the funds.
That way, each depositor can qualify for up to $250,000 of FDIC coverage.

You should consider taking your business elsewhere if the agent can not or will not identify the
bank, or if the name of the bank in the materials provided by the agent does not match what you
are being told otherwise. That is because there have been cases reported of unscrupulous brokers
allegedly misleading or defrauding investors with CD offers. For more information about federal
deposit insurance, read the FDIC's publication Your Insured Deposits or call the FDIC's Central
Call Center at 1(877) 275-3342 or (877) ASK-FDIC. For the hearing impaired call 1(800) 925-
4618 or 1(703) 562-2289 (8:00 a.m. to 8:00 p.m. Eastern Time).

Investigate Any Call Features – Callable CDs give the issuing bank the right to terminate the
CD after a set period of time, but they do not give you that same right. If the bank calls or
redeems your CD, you should receive the full amount of your original deposit plus any unpaid
accrued interest.

Understand the Difference Between Call Features and Maturity – Don’t assume that a
"federally insured one-year non-callable" CD matures in one year. If you have any doubt, ask the
sales representative at your bank or brokerage firm to explain the CD’s call features and to
confirm when it matures.

Confirm the Interest Rate You’ll Receive and How You’ll Be Paid – You should receive a
disclosure document that tells you the interest rate on your CD and whether the rate is fixed or
variable. Be sure to ask how often the bank pays interest – for example, monthly or semi-
annually. And confirm how you’ll be paid – for example, by check or by an electronic transfer of
funds.

Ask Whether the Interest Rate Ever Changes – If you’re considering investing in a variable-
rate CD, make sure you understand when and how the rate can change. Some variable-rate CDs
feature a "multi-step" or "bonus rate" structure in which interest rates increase or decrease over
time according to a pre-set schedule. Other variable-rate CDs pay interest rates that track the
performance of a specified market index, such as the S &P 500 or the Dow Jones Industrial
Average.

Research Any Penalties for Early Withdrawal – Be sure to find out how much you’ll have to
pay if you cash in your CD before maturity.

Ask Whether Your Broker Can Sell Your CD – Some brokered CDs are issued in the name of
the "custodian" or deposit brokers. In some cases, the deposit broker may advertise that the CD
does not have a prepayment penalty for early withdrawal. In those cases, the deposit broker will
instead try to resell the CD for you if you want to redeem it before maturity. If interest rates have
fallen since you purchased your CD and demand is high, you may be able to sell the CD for a
profit. But if interest rates have risen, there may be less demand for your lower-yielding CD.
That means you may have to sell the CD at a discount and lose some of your original deposit.

Find Out About Any Additional Features – For example, some CDs offer a death benefit that
allows a CD owner’s heirs to redeem the CD without penalty when the owner dies.

The bottom-line question you should always ask yourself is: Does this investment make sense for
me? A high-yield, long-term CD with a maturity date of 15 to 20 years may make sense for
many younger investors who want to diversify their financial holdings. But it might not make
sense for elderly investors.

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If you have a complaint about a CD you purchased through a bank, try to resolve your complaint
directly with an officer of the bank before involving an outside agency. Financial institutions
value their customers and most will be helpful. If you are unable to resolve the matter with the
financial institution, use the following guidelines to determine where to direct your complaint.