Certificate of deposit

fr:certificat de dépôt

This article is specific to the United States. For a more general article, see Time deposit.

A certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions.

Such CDs are similar to savings accounts in being insured—by the FDIC for banks or by the NCUA for credit unions—and thus virtually risk-free; they are "money in the bank." They are different from savings accounts in that the CD has a specific, fixed term—often three months, six months, or one to five years—and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.


CD rates

In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand. For example, as of 2004 one well-known bank offers 0.40% annual interest on savings accounts from which withdrawals may be made on demand, 0.80% on a 3-month CD, and 2% on a 2-year CD.

Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid-2004, with interest rates expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD.

How CDs work

The consumer who opens a CD may receive a bankbook or paper certificate, but as of 2004 it is common for CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.

At most institutions, the CD purchaser can arrange to have the interest periodically mailed as a check or transferred into another account. This reduces total yield because there is no compounding. Some institutions allow the customer to select this option only at the time the CD is opened.

Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new CD). In the absence of such directions, it is common for the institution to "roll over" the CD automatically, once again tying up the money for a period of time. A holder who actually wishes to withdraw the money should keep a calendar (in case the maturity notice is not sent or gets lost) to ensure that his wishes are communicated in advance of maturity.

Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of six months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity—unless they have another investment with significantly higher return.

CD deposit insurance

The amount of insurance coverage varies depending on how accounts for an individual or family are structured at the institution. The level of insurance is governed by complex FDIC and NCUA rules, available in FDIC and NCUA booklets or online.

Some institutions use a private insurance company instead of, or in addition to, the Federally-backed FDIC or NCUA deposit insurance. Institutions often stop using private supplemental insurance when they find that few customers have a high enough balance level to justify the additional cost.

CD terms and conditions

By law, the Federally-required "Truth in Savings" booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information. The purchaser should read the terms very carefully before buying a CD.

Some of the major variations in the terms of CDs include:

  • Withdrawals of principal may be at the discretion of the bank.
  • The CD may be "called"—i.e. closed out by the bank—at any time.
  • The institution may not commit to sending a notice before automatic rollover at CD maturity.
  • The penalty for early withdrawal may reduce the principal—for example, if principal is withdrawn three months after opening a CD with a six-month penalty.
  • The penalty for early withdrawal—instead of being measured in months of interest—may be calculated to be equal to the bank's current cost of replacing the money.
  • Withdrawal of principal below a certain minimum—or any withdrawal of principal at all—may require closure of the entire CD.
  • Any withdrawal of the interest may be limited to the most recent interest payment rather than the accumulated total interest.
  • A fee may be charged for withdrawals or closure.
  • A government penalty is generally charged for withdrawals or closure before the holder reaches a certain age if the CD is in an Individual Retirement Account.
  • The CD may start earning interest from the date of deposit or at the start of the next month or quarter.
  • Accumulated interest at the time of withdrawal may be calculated only through the last full month or last full quarter.
  • The institution has the right to delay withdrawals by up to 60 days.

Other CDs and CD-related financial products

This article has described the familiar FDIC-insured or NCUA-insured CDs which are usually purchased by consumers directly from banks or credit unions. There are also "certificates of deposit" issued by various entities that do not carry insurance, and there are various CD and CD-backed products offered by investment houses and "CD brokers." These are more complicated, and the purchaser needs to research and carefully understand the terms and conditions that apply.

See also

External links


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