How does a certificate of deposit (cd) work?

Question

I am exploring the idea of opening a cd. I have seen that many banks ask for a minimum deposit of $1,000 to do so.

How does it then work? If I open a 12 month cd with the minimum of $1,000, and the interest rate is %4.25, what am I looking at financially overall?

What are the benefits of doing this, and are there any downfalls?

Answer 1

You deposit a certain amount of money with the bank and earn the offered interest rate, in your case, 4.25%. At the end of 12 months, you would earn approximately $42.50 = benefit. (The money earned is added monthly though, not annually.)

The downside is that you can't use any of that money during the entire 12 month agreement. If you need to access it, you do so with a penalty.

Another downside is that the percentage rate of interest may change in the economy during the course of your investment. Let's say you put your money in a 5-year CD at 4.25% interest, which is currently about average. Then we get a great economy boost, and the average interest rate becomes 8%! But you're locked into the agreement, so you'd still be stuck at that 4.25% rate.

Some CDs are for a shorter length of time. I've done CDs with 4-month, 6-month, and 9-month terms. So generally speaking, CDs are nice and safe, but look around for ones that offer higher percentage rates and shorter terms.

Answer 2

Your certificate of deposit tells the bank that you are depositing funds for them for a specified length of time. In your example, the bank knows that it can utilize your funds for one year before they pay you back with interest accrued. They like having this guarantee which is why the interest paid is higher than a regular savings or checking account. The upside is the higher interest rate, and the fact that a cd produces guaranteed income for you. The downside is that the funds are completely inaccessible without paying a penalty. A standard penalty is about 90 days interest. If you are looking at a cd that pays 4.25% for a year, with a 1000 minimum deposit, then I say keep looking. Many banks in my area are paying 4.75-5.5% for cds around a year with a much lower deposit minimum.

Answer 3

GMAC financial business enterprise is paying 2.ninety 5%/2.ninety one% and its insured with FDIC that's the excellent i've got seen this week EDIT= on the different facet ING Direct is paying a million.75%. CD rats are in a unfastened fall the previous 2 months