Certificates of deposit (CDs) are receipts for funds deposited at a
financial institution. The CD entitles you to a set rate of interest plus
the amount of your original deposit (your principal) at a specified
time called the maturity date.
Essentially, you agree to leave a specified sum of money on deposit
for a set period of time. Funds may be withdrawn before maturity;
in such cases, however, a premature withdrawal penalty will apply.
A typical penalty might be the loss of interest for a quarter.
CDs are considered one of the safest of investments because they
are generally short term and have minimal exposure to inflation.
There may, however, be some reinvestment risk, and as with any
investments there are tradeoffs.
CDs are simple to understand, set up, and use. They operate much
like passbook savings accounts created for a specified term.
Like certain other institutional accounts, CDs are insured up to
$250,000 per depositor per bank by the Federal Deposit Insurance
Corporation (FDIC). The insurance applies to each ownership
format per bank. For example, if you had an individual account, a
joint account with a spouse, and a retirement account at the same
bank, and each account had a balance of $250,000, then all three
accounts would be fully insured by the FDIC for a total of $750,000.
Because CDs are term deposits (they tie up your money for a
specified period), they tend to pay a higher rate of interest than
savings accounts and money market deposit accounts.
Because they represent short-term investments, CDs are fairly
liquid. If you need to draw money out before the term is complete,
you may do so, but you may incur a penalty for early withdrawal.
If you withdraw your money before the maturity date, you will be
obligated to pay an early withdrawal penalty, such as the loss of
interest for a quarter. Therefore, if an emergency arises and you
need your cash sooner than expected, you could stand to lose a
portion of your expected interest (but not your principal).
Interest rates change over time. If they fall substantially while your
money is tied up in a CD, you will be unable to reinvest your CD
funds at the previous rates, since comparable CDs will offer lower
yields. If you want to earn a higher rate, you'll have to invest in
another type of vehicle and probably bear additional risk.
Tip: You can reduce your exposure to interest rate risk and
reinvestment rate risk by investing in CDs with different maturity
periods. By investing in CDs that mature at different times, you
free up your money periodically to take advantage of changes in
interest rates. This is known as laddering your CDs, and there
are several laddering that can be used to implement the strategy.
Generally, interest earned on CDs is taxable on an annual basis
and should be reported as interest income on Schedule B of your
individual federal income tax return. Early withdrawal penalties
charged on CDs are deductible on the federal level.
CNB offers many different CDs to meet your needs! As an optimum
accountholder, you can take advantage of our special CD rates.
Visit CNBank.com/CD to learn more and view
current rates.
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*Before making any investment decision, please consult your legal, tax or financial advisor.