10 Things to Ask Before Purchasing a Certificate of Deposit

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What Are Certificates of Deposit?


1 What Are Certificates of Deposit?

Certificates of Deposit (CDs) are special deposit accounts. You deposit a fixed sum into an account for a fixed period and earn interest. During the fixed period, you will not have access to this money. When you cash in a CD, you usually receive your original deposit back, plus any accrued interest owed on the account.


2 Are CDs Risky Investments?

CDs are usually low-risk; however, there are a number of CD options. Some CDs carry more risk than others do. Be sure to ask your banker or broker about the different risks associated with the different CDs. He or she should be able to use your risk tolerance to determine the best CD for you.


3 Are There Different Types of CDs?

The type of CD you choose will determine the level of risk on this investment. Below are a few factors that determine a CD’s risk:

- Interest rate

- Maturity

- Callable designation

A few types of CDs are:

- Fixed Rate CDs -- the interest rate is fixed and will not change.

- Variable Rate CDs -- the interest rate may change periodically.

- Callable CDs -- banking institutions have the option of “calling” or terminating the CD after a set period, but the owner of the CD (you) does not have this option. If a CD is called, you should receive your original investment plus any accrued interest.


For more information about the different types of CDs and their features, visit the Securities Industry and Financial Markets Association (SIFMA) Web site.


4 How Are CD Interest Rates Determined?

The two main factors that determine a CD’s interest rate are:

- Length of CD

- Fluctuating short-term interest rates

Not all banking institutions offer the same interest rates on CDs, so it may be beneficial to shop around and find out what rates are being offered. You can quickly compare CD prices at Bankrate.com.


5 How Is the Interest on a CD Paid?

The banking institution will determine if you receive interest payments:

- Monthly

- Quarterly

- Annually

- At the CD’s maturity date

Be sure you understand the terms of the interest payments and ask for these terms in writing. You also want to find out if your banking institution sends you a check, provides electronic transfers, or uses a different method of payment.


6 Are CDs FDIC Insured?

Yes, CDs are FDIC insured, up to $250,000 per holder in a federally covered financial institution.


7 What Is the Maturity Date of a CD?

A CD’s date of maturity is the date when you can redeem your CD. This means you can withdraw your money and any accrued interest without a penalty. You and your financial institution decide on your CD’s date of maturity.

Be sure to check with your financial institution to find out if the CD automatically renews if you do not withdraw your money. You also want to be aware of prior notice that may be required to redeem your CD on its date of maturity.


8 Is There an Early Withdrawal Fee?

In most cases, you will need to pay a fee or forfeit the interest due for an early withdrawal. Ask for the early withdrawal fee information in writing from your banking institution and make sure you completely understand how this fee will be assessed.


9 Where Can CDs Be Purchased?

CDs can be purchased through:

- Most banks.

- Some brokerage houses (known as deposit brokers)


If you choose to purchase CDs through a brokerage house, you may want to find out:

- Which bank or institution is issuing the CD

- If higher risks are involved

- About record-keeping procedures to ensure FDIC insurance

- If a broker can sell your CD in exchange for early withdrawal without prepayment penalty

10 Where Should Complaints or Concerns Regarding a CD Be Directed?

Begin with the financial institution from which you purchased the CD. Normally, this company will be happy to help with any concerns you may have because the company wants to keep your business.

However, if you do not receive desired results, you can contact:

- FINRA (Financial Industry Regulatory Authority) at www.finra.org/index.htm for CDs purchased through a bank

- The SEC (Securities and Exchange Commission) at www.sec.gov/answers/brokeredcds.htm for CDs purchased through a brokerage firm


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