A certificate of deposit ( CD ) is a time deposit, a financial product that is generally sold in the United States and elsewhere by banks, junk agencies, and credit unions.
CDs are similar to savings accounts because they are insured "money in the bank" and thus almost risk free. In the United States, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions. They are different from savings accounts because CDs have a fixed period of time, fixed (often one, three, or six months, or one to five years) and, usually, fixed interest rates. The bank intends that customers hold the CD to maturity, at which time they can withdraw their money and accrued interest.
In return for customers who deposit money for an agreed period of time, agencies usually provide a higher rate of interest than they do on accounts that customers can withdraw from demand - although this is unlikely in the reverse yield curve situation. Interest rates remain common, but some agencies offer CDs with various forms of variable rates. For example, in mid-2004, interest rates were expected to increase - and many banks and credit unions began offering CDs with "bump-up" features. This allows a single interest rate adjustment, at the time the consumer chooses, over the time period of the CD. Sometimes, financial institutions introduce CDs that are indexed into the stock market, bond market, or other index.
Some of the CD features are:
- The larger principle should/can receive a higher interest rate.
- A longer period of time usually results in higher interest rates, except in the case of reversed return curves (eg, before a recession).
- Smaller institutions tend to offer higher interest rates than larger ones.
- Personal CD accounts generally receive higher interest rates than business CD accounts.
- Banks and uninsured credit unions by FDIC or NCUA generally offer higher interest rates.
CDs typically require a minimum deposit, and may offer higher rates for larger deposits. Best prices are generally offered on "Jumbo CD" with a minimum deposit of $ 100,000.
Consumers who open the CD can accept paper certificates, but now common to CDs consist of only book entries and items displayed in the consumer's periodic bank statements. That is, there is often no such "certificate". Consumers who want a hard copy who verifies their CD purchase may request a bank statement from the bank, or print it themselves from an online banking service of a financial institution.
Video Certificate of deposit
Menutup CD
Withdrawals prior to maturity are usually subject to substantial penalties. For a five-year CD, this often loses interest up to twelve months. This penalty ensures that generally there is no interest of the best holder to withdraw the money before maturity - unless the holder has another investment with significantly higher returns or has a serious need for money.
Generally, the agency sends a notification to the CD holder shortly before the CD matures for clues. The notification usually offers a choice of withdrawal of principal and accumulated interest or "rolls it" (deposits it to a new CD). Generally, "windows" is allowed after maturity where the CD holder can melt the CD without penalty. If there is no such hint, it is common for the institution to automatically roll the CD, again tying the money for a certain period of time (although the CD holder may be able to determine when the CD is not rolled over the CD).
Maps Certificate of deposit
CD refinancing
The Truth in the Rule of Saving DD requires that the states are insured, at the time of account opening, penalties for early withdrawal. It is generally accepted that this penalty can not be revised by the depository before maturity. However, there are cases where the credit union modifies the initial withdrawal penalty and makes it retroactive on the existing account. The second incident occurred when Main Street Bank of Texas closed a group of CDs early without full interest payment. Banks claim disclosure allows them to do so.
The penalty for early withdrawal prevents the depositor from taking advantage of the next better investment opportunity over the time period of the CD. In an environment of increased interest rates, penalties may not be enough to prevent depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. The additional interest from a higher-yielding CD may be more than offset the early withdrawal penalty charge.
Staircase
While longer investment terms result in higher interest rates, longer periods of time may also result in a loss of opportunity to lock in higher interest rates in an economy with increasing rates. The general mitigation strategy for opportunity costs is the "CD ladder" strategy. In the ladder strategy, the investor distributes the deposit over a period of several years with the aim of keeping all the money in the longest period of time (and therefore a higher level), but in that way the part matures every year. In this way, depositors benefit from long-term interest rates while retaining the option to reinvest or withdraw money in a shorter period of time.
For example, an investor starting a three-year ladder strategy begins by depositing the same amount of money each into a 3-year CD, a 2-year CD, and a 1-year CD. Since then, the CD reaches maturity every year, at which time investors can re-invest in a period of 3 years. After two years of this cycle, the investor has all the money deposited at the level of three years, yet has one-third of the deposits due every year (which can then be reinvested, augmented, or withdrawn by the investor).
Responsibility for keeping ladders fall on depositors, not financial institutions. Since the ladder does not rely on financial institutions, depositors are free to distribute ladder strategies in more than one bank. This can be profitable, since smaller banks may not offer long term provisions from some of the larger banks. Although laddering is most common with CDs, investors may use this strategy on deposit accounts anytime with similar terms.
Step-up callable CD
Step-Up Callable CDs are forms of CDs where interest rates increase several times before the CD matures. This CD is often published for a period of up to 15 years, with an increase in interest occurring in 5 and 10 years.
Typically, the initial interest rate is higher than what is available on a shorter CD, and the rate increases with each upgrading period.
This CD has a "call" feature that allows the issuer to return the deposit to the investor after a certain period of time, which is usually at least a year. When the CD is called, investors are given back their deposits and they will no longer receive interest payments in the future.
Because of the call feature, interest rate risk is born by the investor, not from the issuer. This risk transfer allows Step-Up Callable CDs to offer higher interest rates than currently available from un-dialable CDs. If the interest rate declines in effect, the issuer will call the CD and republish the debt at a lower interest rate. If the CD is called before maturity, investors are faced with the risk of reinvestment. If the prevailing interest rate increases, the issuer will allow the CD to mature.
Insurance deposit
The amount of insurance coverage varies, depending on how accounts for individuals or families are organized in institutions. Insurance rates are governed by complex FDIC and NCUA regulations, available in FDIC and NCUA booklets or online. The current standard insurance coverage is $ 250,000 per owner or depositor for a single account or $ 250,000 per co-owner for a joint account.
Some institutions use private insurance companies instead of, or in addition, federal government-sponsored FDIC or NCUA deposit insurance. Agencies often stop using personal additional insurance when they find that some customers have a high enough balance rate to justify the additional cost. The Certificate of Deposit Account Registry Service program allows investors to save up to $ 50 million invested in CDs managed through a bank with full FDIC insurance. However the tariff is unlikely to be the highest.
Terms and conditions
There are many variations in terms and conditions for CDs.
The "Truth in Savings" booklets required by government, or other disclosure documents that provide CD provisions, must be available prior to purchase. Employee agencies are generally not familiar with this information; only written documents that have legal weight. If the original publishing institution has joined another agency, or if the CD was closed early by the buyer, or there is another problem, the buyer should refer to the terms and conditions documents to ensure that the withdrawal is processed in accordance with the original terms of the contract.
- The terms and conditions may change. They may contain languages ​​like "We can add, delete or make other changes (" Changes ") we want these Terms at any time."
- The CD may be invoked. This requirement may state that the bank or credit union may close the CD before the expiry of the term.
- Payment of interest. Interest can be paid as it accumulates or may accumulate on a CD.
- Interest calculation. The CD can start earning interest starting from the date of deposit or from the beginning of the following month or quarter.
- Right to delay withdrawal. The institution generally has the right to suspend the withdrawal for a certain period of time to stop the bank running.
- Basic withdrawal. Probably at the discretion of the financial institution. Withdrawal below a certain minimum - or withdrawal of the principal at all - may require the closing of all CDs. US U.S. Retirement Account accounts may allow withdrawal of Minimum Distribution IRA Required without withdrawal penalties.
- Withdrawal of interest. May be limited to the latest interest payments or allow for the total withdrawal of interest accumulated since the CD is opened. Interest can be calculated up to the date of withdrawal or until the end of the last month or the last quarter.
- Penalty for early withdrawal. Can be measured in the month of interest, can be calculated the same as the current cost of the institution to replace money, or can use another formula. May or may not reduce the subject - for example, if the principal is withdrawn three months after opening the CD with a six-month sentence.
- Cost. Fees can be specified for withdrawal or closing or to provide a certified examination.
- Automatic renewal. The institution may or may not commit to send a notice before an automatic rollover on the CD due date. The agency may specify a grace period before automatically scrolling the CD to a new CD at maturity. Some banks have been known to update at a lower rate than the original CD.
Criticism
CD interest rates closely track inflation. For example, in one situation, the interest rate may be 15% and inflation may be 15%, and in other situations, the interest rate may be 2% and inflation may be 2%. Of course, these factors cancel, so the real interest rate is the same in both cases.
In this situation, it is a misinterpretation that interest is an increase in value . However, to keep the same value, the withdrawal rate should be equal to the real rate of return, in this case, zero. People may also think that a higher-level situation is "better", when the real rate of return is the same.
Also, the above does not include tax. When taxes are considered, the above higher level situation is worse, with lower real returns (more negative), although the real rate of return before tax is the same. After inflation, after tax return is important.
Author Ric Edelman writes: "You are not making money in bank accounts (in real economy terms), just because you should not." On the other hand, he said, bank accounts and CDs are fine for holding cash for a short time.
Even if the CD rate tracks inflation, this can only be the expected inflation when the CD is purchased. The actual inflation will be lower or higher. Locking interest rates for the long term may be bad (if inflation rises) or good (if inflation goes down). For example, in the 1970s, inflation rose higher than before, and banks slowly raised their interest rates. It does not affect a person much with a short note, because they get their money back, and they can go to another place (or the same place) that gives it a higher rate. However, longer notes are locked in their numbers. This brings up a funny nickname for the CD. A little later, just the opposite, where inflation is declining. This is not very helpful to someone with a short note, because they immediately get their money back and they are forced to reinvest at a lower level. But longer records become very valuable because they have higher interest rates.
However, this applies only to "average" CD rates. In fact, some banks pay much lower than the average tariff, while others pay a much higher rate (an unusual double difference, for example, 2.5% vs. 5%). In the United States, depositors can take advantage of the best FDIC guaranteed rates without increasing the risk.
Investors should be suspicious of high interest rates on CDs. Allen Stanford uses high-level counterfeit CDs to draw people into his Ponzi scheme.
Finally, the statement that "CD interest rates closely track inflation" is not necessarily true. For example, during a credit crunch, banks are in dire need of funds, and CD rate hikes may not track inflation.
References
External links
- US SEC to buy CD
- The North American Securities Administrators Association buys CDs.
- US SEC Litigation Release 2008 "... a scheme to fool investors, many of them elderly, about $ 3,661,248 by selling fake deposit certificates to investors."
Source of the article : Wikipedia
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