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Certificate of deposit
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Certificate of deposit
A certificate of deposit (CD) is a time deposit sold by banks, thrift institutions, and credit unions in the United States. CDs typically differ from savings accounts because the CD has a specific, fixed term before money can be withdrawn without penalty. CDs also generally have higher interest rates than savings accounts. CDs require a minimum deposit and may offer higher rates for larger deposits. The issuer expects the CDs to be held until maturity, at which time the funds can be withdrawn and interest paid.
In the United States, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.
The consumer who opens a CD may receive a paper certificate, but it is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements. Consumers who want a hard copy that verifies their CD purchase may request a paper statement from the bank, or print out their own from the financial institution's online banking service.
Institutions typically offer higher interest rates compared to accounts that allow immediate withdrawals in exchange for the customer depositing the money for an agreed-upon term, although this may vary in situations like an inverted yield curve. Certificates of deposit (CDs) commonly offer fixed rates, but some institutions also provide CDs with variable rates. For instance, many banks and credit unions started offering CDs with a "bump-up" feature around mid-2004 when interest rates were anticipated to increase. These CDs allow for a single adjustment of the interest rate at a time chosen by the consumer during the CD's term. Additionally, financial institutions may introduce CDs linked to the performance of the stock market, bond market, or other indices.
Some features of CDs are:
Withdrawals before maturity are usually subject to a penalty. For a five-year CD, this is often the loss of up to twelve months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity – unless the holder has another investment with a significantly higher return or has a serious need for the money.[citation needed]
Institutions may mail a notice to the CD holder shortly before the CD matures requesting directions regarding withdrawal. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over", i.e. depositing it into a new CD. Generally, there is a "window" after maturity when CD can be cashed out without penalty. In the absence of such directions, the institution may roll over the CD automatically, once again tying up the money for a period of time. Additionally, the CD holder may be able to specify at the time the CD is opened for it not to be rolled over.[citation needed]
The Truth in Savings Regulation DD requires that insured CDs state the penalty for early withdrawal at the time of account opening. It is generally accepted that these penalties cannot be revised by the depository prior to maturity.[citation needed] However, there have been cases in which a credit union modified its early withdrawal penalty and made it retroactive on existing accounts. The second occurrence happened when Main Street Bank of Texas closed a group of CDs early without full payment of interest. The bank claimed the disclosures allowed them to do so.
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Certificate of deposit
A certificate of deposit (CD) is a time deposit sold by banks, thrift institutions, and credit unions in the United States. CDs typically differ from savings accounts because the CD has a specific, fixed term before money can be withdrawn without penalty. CDs also generally have higher interest rates than savings accounts. CDs require a minimum deposit and may offer higher rates for larger deposits. The issuer expects the CDs to be held until maturity, at which time the funds can be withdrawn and interest paid.
In the United States, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.
The consumer who opens a CD may receive a paper certificate, but it is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements. Consumers who want a hard copy that verifies their CD purchase may request a paper statement from the bank, or print out their own from the financial institution's online banking service.
Institutions typically offer higher interest rates compared to accounts that allow immediate withdrawals in exchange for the customer depositing the money for an agreed-upon term, although this may vary in situations like an inverted yield curve. Certificates of deposit (CDs) commonly offer fixed rates, but some institutions also provide CDs with variable rates. For instance, many banks and credit unions started offering CDs with a "bump-up" feature around mid-2004 when interest rates were anticipated to increase. These CDs allow for a single adjustment of the interest rate at a time chosen by the consumer during the CD's term. Additionally, financial institutions may introduce CDs linked to the performance of the stock market, bond market, or other indices.
Some features of CDs are:
Withdrawals before maturity are usually subject to a penalty. For a five-year CD, this is often the loss of up to twelve months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity – unless the holder has another investment with a significantly higher return or has a serious need for the money.[citation needed]
Institutions may mail a notice to the CD holder shortly before the CD matures requesting directions regarding withdrawal. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over", i.e. depositing it into a new CD. Generally, there is a "window" after maturity when CD can be cashed out without penalty. In the absence of such directions, the institution may roll over the CD automatically, once again tying up the money for a period of time. Additionally, the CD holder may be able to specify at the time the CD is opened for it not to be rolled over.[citation needed]
The Truth in Savings Regulation DD requires that insured CDs state the penalty for early withdrawal at the time of account opening. It is generally accepted that these penalties cannot be revised by the depository prior to maturity.[citation needed] However, there have been cases in which a credit union modified its early withdrawal penalty and made it retroactive on existing accounts. The second occurrence happened when Main Street Bank of Texas closed a group of CDs early without full payment of interest. The bank claimed the disclosures allowed them to do so.
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