How does a Certificate of Deposit Work?
1. Opening a CD: To open a CD, an individual needs to deposit a certain amount of money with a financial institution. The minimum deposit required varies depending on the institution and the type of CD.
2. Choosing the Term: The individual selects the term of the CD, which can range from a few months to several years. The longer the term, typically the higher the interest rate offered.
3. Earning Interest: Once the CD is opened, the deposited funds begin to earn interest at the fixed rate agreed upon. The interest is usually compounded either daily, monthly, quarterly, or annually, depending on the terms of the CD.
4. Maturity: At the end of the term, known as the maturity date, the CD reaches its full value, including the principal amount deposited and the accrued interest. At this point, the individual has several options:
- Renew the CD: Some individuals choose to renew the CD for another term, often with the same or a different financial institution.
- Withdraw Funds: Alternatively, the individual can withdraw the full amount, including both the principal and interest earned.
5. FDIC Insurance: It’s important to note that CDs issued by banks in the United States are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits, providing a level of security for the deposited funds.