CDs

rabbit8February 8, 2005

Can anyone tell me what CD's are and how I can make a purchase and save. I have an idea, but I need to get a better understanding. Thanks in advance for your help.

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steve_o

CDs are Certificates of Deposit. You promise to invest a certain amount of money for a certain period of time for a certain rate of interest.

CDs almost always come in round-number increments ($500, $1000, $5000, etc.) The money is paid "up front" (that is, you don't start with $100 and work your way up to $500; you hand over the $500 all at once).

The time period can vary from a month to several years; it depends on how soon you want that money back.

The amount of interest on your money will vary. The rate typically is higher on longer-term CDs. But interest can be computed different ways. The best way to compare CDs is to ask for the Annual Percentage Rate (APR). That way you're always comparing the same kind of number, calculated the same way.

Most places offering CDs will "roll them over" (reinvest them) when they mature (the end of the agreed-upon time period). You'll simply get a new CD with the same terms (at whatever interest rate is current at the time). You always can choose to get the money back or invest it in another CD or in something else altogether.

If you need your money back before the end of the CD's term, you can still get it. But you usually will forfeit one-quarter's worth of interest. There may be some other penalties associated with that withdrawal, but at least you can get your money. CDs also can be used as collateral for a loan, though loan interest is almost always more than you'll make on a CD.

CDs can be purchased at banks and credit unions. Some other places (some investment firms) also offer CDs (for instance, most stock brokerages will offer CDs through a bank subsidiary or partner).

Good luck!

    Bookmark   February 8, 2005 at 10:05AM
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