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Advantages
- It has a guaranteed, locked-in interest rate
for a specific period of time.
- You can choose from one, three, four, six, or
nine months or one to ten years.
- Usually the longer the period of time that you
loan your money, the higher the interest rate you receive.
- You can often start with a $500 minimum investment.
- CDs are usually insured by a private insurance
company or the FDIC (those that are federally insured are the safest).
Disadvantages
- There is usually an early withdrawal penalty
for taking money out before the CD is mature.
- You must pay local, state and federal taxes
on income.
- You may lock in at a low interest rate for a
long period of time and then see interest rates skyrocket.
A CD is a loan that you make to a savings institution.
Interest rates on CDs will vary from one bank to another and from one area
of the country to another. They are often advertised nationally and you
can purchase them through the mail or from a stock broker. You can call
a bank's toll free number and skip the broker's fee. Be sure the bank or
savings institution from which you purchase is federally insured. Savings
and loans will often offer higher interest rates than commercial banks.
Compare the average yield per year, not the annual percentage yield (APY),
which only tells you what it earns the first year but doesn't take compounding
into account.
If you think interest rates will rise, you may
want to take out short-term 30-, 60- or 90-day CDs. If you have enough
funds, you may wish to "ladder" your CDs (purchase in different time lengths
of maturity), so they mature at different times.
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