Certificate of Deposits (CDs) are safe investment among other investments. Many financial institutions offer this type of investment such as banks or credit unions. Unlike any other investment which has high risk of losing money, CDs are guarantee by the FDIC with one condition. Only one deposit account in a bank or credit union with the amount of up to $250,000 will be protected. Certificate of Deposit works when you invest your money into that one bank or credit union for an agreed period of time. The banks usually offer higher interest rates than saving account or checking account. This interest rate will give you return over the set period of time. Actually, there are many types of CDs offered by the banks. Hence, these are common CDs bought by the investors:
Traditional CD: This kind of CD is the most common form of CDs. You will receive a fixed interest rate over the set period of time. Generally, when your CDs reach maturity, the banks will inform either to cash out your money or roll it over to a new CD. Many people choose traditional CDs since they can predict how many they will receive at the end of the term. However, this type of CD does not allow the investor to withdraw their money before its maturity date. Early withdrawal will result in a severe penalty.
1. Bump-p CD: This type of CD allows you to take advantage of rising CD. You can swap only once to a higher rate during your investment period and keep that interest rates for the remaining time. Generally, bump-up CD offer lower initial interest rate than the traditional one.
2. Liquid CD: It is the flexible CD which allows you to withdraw your money during your investment period without a penalty. However, Federal law requires that you are not allowed to take your money for at least seven days after you make initial deposit. Some banks may extend the period and also allow a specified amount of money.
3. Callable CD: Banks have the power to recall the CD before the maturity date or at a specified time. It happens when the interest rates fall significantly from the initial interest rate offered. To attract the investors, banks often offer higher interest rate for this type of CD. Callable CD is popular among the brokerage.
4. Zero-Coupon CD: this CD does not pay out annual interest, it re-invest the payment to be added to your initial deposit instead. So, the profit will increase because of the increasing investment. However, that re-investment of the interest rates will be taxed.
5. Brokered CD: this type of CD is the one offered by the brokerage. Brokerage has all-access pass to thousands of banks’ CD offering, so they usually offer a higher interest rate. This CD may sound appealing but you have to pay a fee to purchase the account.