What is a CD?
A Certificate of Deposit (CD) is a financial product offered by banks and credit unions where an individual deposits a sum of money for a fixed period, typically ranging from a few months to several years, in exchange for a predetermined interest rate that is higher than a regular savings account. Once the CD matures, the individual receives their initial deposit plus accrued interest. CDs are considered low-risk investments as they are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA).
Key Features of CD:
- Fixed-Term Investment: CDs have a fixed term during which the deposited funds must remain untouched. This term can range from a few months to several years, and during this time, the investor cannot access their funds without incurring an early withdrawal penalty.
- Fixed Interest Rate: CD deposits earn a fixed interest rate throughout the term of the investment. This rate is typically higher than that of regular savings accounts, providing investors with a predictable return on their investment.
- FDIC or NCUA Insurance: CDs are insured by either the FDIC or NCUA, depending on whether they are held at a bank or credit union, respectively. This insurance protects the investor’s principal investment (up to certain limits) in the event of bank or credit union failure, providing added peace of mind and security.
Difference between Certificate of Deposit (CD) and Savings Account
Understanding the difference between Certificates of Deposit (CDs) and Savings Accounts is essential for effective financial planning. While both offer opportunities to grow savings, their structures and features differ significantly.
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