Before comparing interest rates or buying a CD at the bank, come to an understanding on how Certificates of Deposit work.
Rules and Regulations of Bank CDs
CDs, commonly known to many as bank certificates of deposit, are issued by many different banks. CDs are tightly regulated via state and federal banking regulators. Other than convenience by way of a simple transfer from your account to the CD, CDs are also very safe. The rates that are paid on CDs fall under Regulation T of the US Federal Reserve System, which dictates how the banking community as a whole may offer CDs and how they are to count towards meeting a given bank's reserve requirements.
CDs that are federally insured by a bank are capable of being offered by a wide variety of different credit unions and other banking institutions. These CDs are capable of being purchased online or directly through a broker, or even right over the phone, and then you can keep them inside of your normal brokerage account. CDs are capable of being written for a maturity ranging from just a few months to as many as several years in length. CDs can be written for all lengths depending on what the funding needs are for the particular bank in question. CDs tend to be guaranteed by the FDIC, which stands for the Federal Deposit Insurance Corporation up to a certain amount of money.
How do Bank Certificates of Deposit Work?
When you buy a CD, it is not unlike making a purchase of a bond. There is a minimal amount of paperwork and most of the purchasing can actually be completed online. The CD is going to have a maturity rate and a coupon rate that are attached to it. Purchasers can make the decision of receiving the dividends or having the dividends reinvested back into the account and then paid at the time of maturity.
Banks are going to advertise their CDs based on the APR, which stands for Annual Percentage Rate. The APR assumes that all of the dividends are going to be invested back in until the point of maturity. You should be buying a CD that is based on the highest possible APR that you can get rather than the advertised rate of the coupon. You are also going to want to make sure that you understand how the CD insurance feature actually is going to work for you. The insurance limits are going to vary, and they are sometimes temporarily raised to amounts like $250,000, which is going to include all of the principal and all of the interest that has been paid.
It can be a good idea to invest in a CD from the bank, but it's only really a good idea if you actually know what you're doing.
Photo Credits: emtboy9
Originally posted 2009-11-09 03:31:56. Republished by Blog Post Promoter
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