Certificate of Deposit
A certificate of deposit (CD) is also called a time deposit, and are most commonly issued by
banks and credit unions. The CD is tied to a specific maturity date which can range anywhere from 3 months to 5 years and will
pay interest in the amount specified by the institution. The amount of interest you receive will depend on the amount of money
you are investing (CD's can be issued in any amount by an institution), the length of the term you are investing for, and with
which institution you are doing your investing.
Certificates of deposit are insured by the FDIC, and so they are very safe. They tend to pay slightly more interest than T-Bills simply because
there is just slightly more risk that the bank or credit union will go broke, but still, the liklihood of that happening is
slim at best.
Advantages of the CD are its ability to preserve principal without risk, and also the fact that it is accessible to just
about any investor since CD's are issued in small denominations.
The primary disadvantage of a CD is that you are required to "lock" your money up with your bank until the CD matures.
Generally, you can always cash out of a CD at any time, but you will probably pay a hefty penalty, usually equivalent
to six months' interest.
Table of Contents
Money Market: Introduction
- What is a Money Market?
- Treasury Bill (T-Bill)
- Certificate of Deposit (CD)
- Commercial Paper
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