Certificates of Deposit

CDs are savings vehicles that offer set interest rates for a fixed period of time. You make a one-time investment and earn interest until the CD’s term is up and the principal is returned; there are usually penalties for early withdrawals. Your investment is insured by the FDIC (Federal Deposit Insurance Corporation) for up to $100,000 per institution.

Why Invest in a CD?

• CDs offer a fixed rate of return and are generally FDIC insured up to $100,000 per depositor, per institution. This insurance covers the principal and accrued interest on your CD.
   
• CD maturities range from three months up to fifteen years (subject to availability). The depository institutions periodically establish new offering rates.
   
• The minimum purchase is $1,000, with additional increments of $1,000 up to $100,000 maximum (including interest) with each issuing bank.
   
• CDs can be issued by various depository institutions, including commercial and savings banks and federal savings and loan associations.
   
• Zero coupon CDs are available in limited maturities. Purchased at a discount to their face value, they mature at par, eliminating concern over how to reinvest interest distributions. Interest income from zero coupon CDs is subject to taxation annually as ordinary income, even though you receive no income. (Consult your tax advisor for more information.) The market value of zero coupon CDs fluctuates more than traditional CDs and therefore may not be suitable for investors with liquidity needs. Buyers should be prepared to hold the CDs until maturity.
   
• Callable “step-up” CDs are also available. These are CDs in which interest rates can increase over time on a predetermined schedule. After a noncallable period-typically one or two years-these CDs are callable by the issuer. In return for the high yields offered by CD “step-ups,” investors must be able to accept the risk of their CD being called (redeemed) before maturity. This means the investor will probably have to reinvest principal at a lower interest rate. As with traditional CDs, clients wishing to sell their CD “step-ups” prior to maturity will also be subject to market risk (the investment may be worth more or less than its original cost). Given that the market for CD “step-ups” is relatively new, liquidity in the secondary market is limited. Buyers of CD “step-ups” should be prepared to hold the CD until maturity or call.
   
• Generally, CDs may not be withdrawn prior to maturity. The market value of the CDs will fluctuate so that your CD, if sold prior to maturity, may be worth more or less than its original cost. Additionally, liquidity in the secondary market can be limited. If you die or are declared incompetent by a court, your heirs or beneficiaries can redeem the CD prior to its maturity without penalty.

Advantages and Disadvantages