Certificates of deposit are interest-bearing securities issued by banks that guarantee a pre-determined amount of accrued interest in return for depositing money in a special savings account for a specific period. This period may range from several days to several years with respect to the size of the deposit and manner of interest accrual. The minimum purchase amounts for certificates of deposit are not uniform and vary from bank to bank depending on the type.
Certificates of Deposit
Also called CDs, certificates of deposit are physical documents granted by a bank to an investor who purchases a CD. The certificate affirms that the holder has deposited a specific amount of money commensurate with the CD's face, or par, value in a special time deposit account for a definite length of time, or maturity period. In return, the bank guarantees that the holder will receive all accrued interest and principal when the CD matures. The minimum deposit required usually relates to a CD's smallest denomination and maturity period.
Maturity Periods and Withdrawals
Unlike a bond, which pays accrued interest in payments between the time it is issued and the time it matures, a CD does not carry interim benefits for the holder. Instead, a CD pays the entirety of accrued interest plus principal only at maturity. In the interim, the holder agrees not to withdraw any of the money from the time deposit account unless willing to pay significant percentage penalties.
Regular CDs
Banks that issue traditional CDs with a maturity period between seven days and roughly five years requires investors to deposit a minimum of between $500 and $10,000. Traditional CDs are affordable and can help the average consumers achieve short- and medium-term financial goals.
Jumbo CDs
Jumbo CDs have a range of maturity periods similar to traditional CDs: between six months and five years. By contrast, jumbo CDs offer higher interest yields and require that investors deposit at least $100,000 for purchase. The relatively higher interest yields on jumbo CDs make them an appropriate investment choice for those wishing to augment their savings for a down-payment on a home.
Negotiable CDs
Negotiable CDs, unlike traditional CDs and jumbo CDs, may be sold in the secondary market at any time before the CD matures. The minimum deposit requirements for negotiable CDs are extremely high: between $100,000 and $1 million, depending on the bank. Negotiable CDs are advantageous for high-net-worth investors who may wish to retrieve their money before maturity or speculate on future interest rates.
Tags: accrued interest, maturity period, deposit account, five years, higher interest, higher interest yields, interest yields
