CD Rates

• CD rates are usually higher than savings account rates and checking accounts because of the limited access you have to money that is in the certificate of deposit. Because the bank has confidence that it will have access to the money for the specified period of time, it can invest it in long-term investments that yield a higher rate of return. To give investors an incentive to invest in a CD rather than a savings account, banks give higher interest rates on the CDs.
  
  

Choosing A CD

• Certificates of deposit are offered by both banks and brokerage firms. When buying a CD, you should first determine how much money you can afford to not have access to and for what length of time you will not need it. CDs that have longer maturity times and larger investments will generally have the highest rates. You should also find out what the penalties for withdrawing the money from a CD early are because even if you do not think you will need it, an emergency may arise.
  
  

Advantages of CDs

• CDs usually lock in a guaranteed interest rate for the life of the CD. This interest rate will not change even if the stock market drops dramatically, which makes CDs a promising investment for conservative individuals who are just looking for a small but stable return. Another advantage to a CD is that it is insured for $250,000 per person rather than the $100,000 that savings and checking accounts are insured for.
  
  

Disadvantages of CDs

• Though CD interest rates are greater than savings accounts, they are mediocre when you compare them to other investments, like stocks and bonds. There are also stiff penalties for withdrawing your money early. The federal government requires that the penalty for withdrawing early from a CD to be at least 7 days of interest, but there is no cap on the penalty. It is not uncommon to see penalties of several months of interest for an early withdrawal.
  
  

Payment of Interest

• CD can pay interest in two ways--either as a periodic check made out to you or transferred into another of your accounts or it can be compounded into your CD. For those who invested in the CD to guarantee a steady stream of income, it is better to have the interest paid out to you. However, if you invested in the CD for the long-term interest, it is better to have the interest put back into the CD so that it increases future interest payments.