Certificate of Deposit question?

Question

Ok So I am thinking on CD's. Lets say I retire at age 60. I am wondering exactly how these CD's work and if there is a maximum amount you can invest in a CD? Lets say I invest 500,000 in a CD after retirement and its 6% APY. What I dont get is the difference between the 1 month, 2 month, 6 month, 1 year cds. This may sound like a dumb question, but how do you figure the interest rate over these periods. If you cd yields 6% annually and its a 6 month cd then you get 3% in that 6 months, is this correct? Also, can you take the lump sum out of the CD after it has expired? Please help me out. Thanks

Answer 1

in your example of a 6 month CD earning 6%, you are missing it somewhat. APYs are calculated annually. When you alter the term for anything but the 12 month year, the rate still remains the same, but the amount that you collect will differ.

In your example, of 6 mo. 6% with $500k, you would earn $30k per year over & over each year (it would actually be higher due to compounding, but lets keep it simple) but you would get $15k every 6mos assuming that you let it continue to roll over. It would be the equivolent of earning 3% for the whole year, but you got it in 6 mos, so it is not really the same as earning 3% vs. 6%. Likewise, you dont earn 12% over 2 yrs, its 6% each year.

The same goes for all of the other odd term months. A 3 mo CD earns $7500 every 3 months, a 2 month earns $5k per 2 months 6 times a year or for the same $30k.

Answer 2

Once you open a CD, the money is locked in until the term expires. By locked in, it means that if you withdrawal the money early, you do not get a portion of the interested earn and you might actually have to pay a penalty to get your money out. Generally, CD roll-over at the end of the period with a week or two grace period, so with a 3 month CD you can access your money 1 week every 3 months, with a 6 month CD can access your money 1 week every 6 months. During this grace period you have the option to "cash out the CD" and take the money as a lump payment. Also many banks have CD that will let you recieve the just interest on a monthly basis. The advantage of the longer term CD is the bank will generally pay you a higher interest rate.
The interest rate the bank quote are the "annual rate", so it is easier to compare rates, this is the rate after the money is left in for 1 year, for a 6 month CD you will only recieve 1/2 this interest since 6 months is 1/2 a year. While a 30 month CD will recieve 2 1/2 this interest since 30 months is 2 1/2 a year.
Generally, what people do is open several CD at once, so they can earn a higher interest return on some of their money without locking up all of their money for a long time. For example, instead of opening 1 CD for 3 months, the will open 4 CDs. With each of the 4 CDs is for a year but they open these CD 3 months apart, so every 3 month they have one of the 4 CD openning up.

Answer 3

I don't think there is a limit on the amount of a CD. However, I would not put it all in one CD because if you had to have some money for an emergency and had to cash a CD before its' maturity date you would not be penalized on the whole amount of your CD savings, only on the one you cashed in early.
A 6 month CD that pays 6% annually would earn interest at the 6% rate but only for 6 months, one half of a year. You could say, for the sake of figuring out how much $ you would earn in that 6 month period, that you would get the same as a 3% CD for a year.
When the CD has matured you can do anything you want with the entire amount plus the interest it has accumulated. As far as that goes, you can take the entire lump sum at any time before the CD has matured. You would lose some of the interest it had accumulated up to that point as a penalty for withdrawing the money befor its' maturity date.

Answer 4

The differences are that the longer the term of the cd usually the higher the interest rate is. Once you put your money in a cd you can't add to it or take money out until the term is up without paying a penalty. You lock your money in there at that interest rate for the term you choose. As far as how much you get if you have a 6%apr and your cd is only for 6mo, ask your financial institution how the interest is calculated on that particular cd. Some places figure theirs differently. Thre are different types of cd's and that also determines the maximum you can deposit in there. I think you can deposit however much you want to, but usually the bank or credit union can only have your money insured by fdic or ncua up to a certain dollar amount.

Answer 5

A Certificate of deposit is basically an agreement for you, to lend a financial institution, a certain amount of money, for a defined period of time.

Yes, if you Lend (buy Cert) to the institution (bank) 100,000 At 6% per year rate for 6 Months, at the end of 6 months you will gets your $100,000 back plus 3% ($3,000) ...total $103,000.

The difference in rates for different time periods is because of the perceived risk in future interest rates.

NORMALLY...the lowest interest rate is now, and the most expensive is 30 years...The reason is everyone knows how inflation is now, but not 30 years in the future.

Would you tie up your money for 30 years at a low interest rate if inflation would conceivable turn the buying power of that money to 1/10th of what it is now?

Sometimes, longer term rates are lower than some earlier dates, this is because investors are expecting a drop in rates in the future and want to lock in at those rates, but there is so much money looking for a place to rest, the rates are driven down. Money is a commodity. It responds to the rules of Supply and demand.

Answer 6

maximum banks provide you a grace era to come to a decision what you % to do. whilst it comes time to come to a decision, initiate checking around on the charges. from time to time the charges will bypass up and a few banks have better fees than others. Then, once you have discovered the cost you %, you may purely tell your financial employer what to do with it. My suggestion I even have found out from experience, do not do not something and purely permit it roll over. some banks will roll it into the backside value. make an effort and do slightly examine whilst it comes due, you would be happy you probably did.