What is a CD in banking?

Question

What is a CD in banking? what is APY? How does it work? Is it good for someone who is starting to save money and putting it in a bank?

Answer 1

In finance, "CD" stands for "Certificate of Deposit" and it is called a "Share Certificate" by some credit unions. Originally, a bank would have a "certificate" showing that a deposit had been made with that bank, naming the depositor, the interest rate (rate of return), the term (how long the money would be deposited), the principal (amount of money deposited) and what happens at the end of the term. Example: John Doe deposited $1,000.00 at 5.2% for 24 months. Certificate automatically renews upon maturity.
"APY" stands for "annual percentage yield". There are literally hundreds of methods of computing yield, or interest rates. If you are filing a 1040, you might use one method; if you are a used car dealer, you might use another. To avoid confusion, the Federal Government came up with "APY" so consumers would understand the "real" interest rates they are being charged for a rate. Part of the reason for different rates is due to the time value of money; money in hand is worth more than the same amount in the future. Another way of looking at it is to say if you deposit money in a bank, you want your money to "work" for you; hence, you want as high an APY as possible.
When starting to save, the best bet is with a bank (credit union or other comparable). The best rates are for the larger sums of money; banks may pay 5.2% for as little as $250.00 deposited for, say, 24 months. If you save up until you have $10,000.00, then you have other savings options; however, usually there is not much difference in rates. Another option is U.S. Savings bonds which you can purchase in a bank. Current rate for an "I" bond is 4.52%. However, you must not cash the bond in if you want this rate for several years; you CAN NOT cash it for six months. You can check out savings bonds at www.savingsbonds.gov.

Answer 2

Above poster gave great answer but forgot to mention- with CDs, you can take the $ out early, but you will pay or forgoe a 'penalty', usually 3 months interest. Honestly, I think the current Cd rates I have seen stink- they're not much over what someplaces offer fro savings account interest.
www.ingdirect.com
www.hsbcusa.com
https://www.emigrantdirect.com/EmigrantDirectWeb/index.jsp

These websites have some of the best rates around for savings or CDs.

The upside of CDs? You can 'trick' yourself into not using the 4, telling yourself it's locked up until maturity (even though you COULD access it in a pinch).

Answer 3

A CD is a certificate of deposit, it allows you to earn interest for the term of deposit. APY is the interest earned per year in percentage form. A certificate of deposit matures on a certain date and that is when you receive the principal and interest.

Normally you would put money into a money market account which is liquid.