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The Curious Bag
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Certificates of deposit (CDs) provide a relatively safe alternative to investing in equity or bond markets by investing a specified amount of money for a defined period of time. During the time that the money is invested, the issuing institution will pay interest payments to the investor at regular times.
Difference in Interest Rates
The difference in interest rates depends on the financial institution and varies by the invested amount and maturity date. A high-yield CD requires a larger deposit and will earn larger returns.
Benefit of Investing in High-Yield CDs
For individuals willing to invest larger amounts of money in CDs, the benefit is to allow the deposited funds to grow at a higher interest rate and receive the original investment plus accrued interest payments.
Withdrawing Early
There are costly fees to withdrawing funds early from a CD. Fees will typically erase any gains made during the time the funds were invested in the CD or will decrease the original invested sum.
Investment Amounts
Depending on the issuing institution, investors can put their money in CDs of varying amounts and for different amounts of time or ladder their CDs to take advantage of short- and long-term interest rates.
Federal Deposit Insurance
The Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000. However, on January 1, 2014, FDIC protection will revert to $100,000.
Source:
FDIC: Change to FDIC Insurance Amounts
Financial Markets and Institutions; Jeff Madura; 2007
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