What certificate of deposit
What is a certificate of deposit?
Certificate of Deposit: Also called a “Bank Deposit Certificate”, it is a document issued by a bank or credit union that proves that its holder has a financial deposit in the bank (or bank).
The first certificate of deposit in the United States of America was issued by the bank, which is known today as “Citibank“, in February 1961.
How does a certificate of deposit work?
When the maturity date is reached, the amount of the deposit and the interest due on it is released and the depositor can withdraw it. But if the depositor wants to break the deposit, i.e. withdraw it before waiting for the maturity date, then he must deduct it to another bank and pay financial fees for that that vary according to the remaining period of maturity, the amount of the deposit and the interest rate.
Bank deposits are available with a large number of options for the maturity period, which in some banks ranges from one or three months to five years, and the interest increases with the increase in the maturity period.
Types of certificates of deposit
There are many types of certificates of deposit, the most prominent of which are:
- (Traditional Certificate of Deposit): Comes with a fixed interest rate, a stiff penalty for early withdrawals, and Federal Insurance.
- (Bump-up Certificate of Deposit): It gives lower interest rates than the traditional certificate of deposit, but if the interest rates on the certificate of deposit increase after purchasing it, this type of certificate of deposit gives the option to raise the interest rate. To exercise this option, the depositor must be informed in advance of the bank of the same.
- Step-Up Certificate of Deposit: It works similarly to a leveraged certificate of deposit, except that these ever-increasing interest rate increases happen on their own from the bank’s end. The depositor does not need to personally ask the bank to raise interest rates.
- Broker Certificate of Deposit: Obtained through brokerage accounts. Brokers can represent a bank or financial institution. Sometimes several banks cooperate with one agency. This Certificate of Deposit offers better interest rates, but the risk is higher compared to a traditional Certificate of Deposit.
- (Liquid Certificate of Deposit): This type of certificate allows the depositor to withdraw funds within the agreed period without paying any early withdrawal penalty. It is flexible enough to transfer funds from a Certificate of Deposit to a Certificate of Deposit with a higher payment rate, but its interest rates are lower compared to a traditional Certificate of Deposit.
Benefits of certificates of deposit
Certificates of deposit are characterized by many good aspects and benefits, most notably that they give a fixed interest rate and higher returns than a traditional savings account, as well as the option to receive interest earned either monthly or annually. With increasing lengths, allowing investors to cash in on their money along the way while keeping some invested for a longer period.
One of the biggest advantages of certificates of deposit is security as they are insured by the Federal Deposit Insurance Corporation. It is a convenient option for savers who want to earn more than most savings, checking accounts, or money market accounts payments, but without exposure to risk or market volatility.