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A CD is a type of investment account that someone can open in the US. CD stands for certificate of deposit, it is an account that a bank or credit union can offer for you. Each establishment will have different offerings, not every CD is created equal and offering the same benefits.
Each CD is different, some may have a longer wait before being mature and some may have different rates of return. The parts of a CD that can change include:
When exploring investment options or savings accounts, you'll frequently encounter two terms: Annual Percentage Yield (APY) and Interest Rate. Both are crucial in understanding how much you will earn or owe, but they are not the same thing. This guide will help you understand each term, how they differ, and why it matters.
The interest rate is the basic rate charged or earned on an investment or loan, expressed as a percentage of the principal, the amount you invest or borrow. It is usually quoted per annum (per year), and does not include any compounding within the year.
Annual Percentage Yield (APY) reflects the total amount of interest paid or earned over a year, taking into account the effect of compounding. Compounding is when you earn interest on both the initial principal and the accumulated interest from previous periods.
Understanding the difference between APY and the interest rate is critical for making informed financial decisions:
Suppose you have the option to invest $1,000 at a simple interest rate of 3% per annum versus the same amount in a CD that has an APY of 3%. If the interest compounds monthly in the APY scenario, you will earn more than the flat 3% interest rate.
Calculation:
Always find the APY when comparing CD offerings, and consider how the interest compounds when assessing loans. The higher the APY or the more frequent the compounding within a given interest rate, the better the potential returns or the higher the cost if it’s a loan.
A Certificate of Deposit (CD) is a type of savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in return, you earn interest. The CD has a higher interest rate than regular savings accounts because the money you deposit is locked in until the maturity date.
When you purchase a CD, you agree to deposit a fixed sum of money for a fixed period and at a fixed interest rate. The bank uses your deposit during this period, and in return, it pays you interest. You receive the original amount plus earned interest back at the end of the term (at maturity).
There are many resources online to help you understand CDs better, this website is great and this YouTube video is great also.
Yes, there are several types of CDs, including traditional CDs, bump-up CDs, no-penalty CDs, and jumbo CDs. Each offers different terms and benefits, such as the ability to bump up to a higher rate, withdraw funds without penalty, or invest larger amounts for higher returns.
Withdrawing money from a CD before the maturity date usually incurs a penalty. This penalty can vary significantly between banks and depends on the CD’s term and other terms of your agreement. Always check the specific penalty details before opening a CD.
Typically, you cannot add money to an existing CD during its term. You must wait until the CD matures to add funds, or you can choose to open another CD with additional funds.
Create Date: June 25, 2024
Last Modified Date: July 15, 2024
