2012年9月10日 星期一

Example of a Certificate of Deposit


If you're looking into smart, low-risk ways to make your money grow, you've probably already thought about choosing a certificate of deposit (CD). This option is popular because it can offer a high interest rate with a very dependable payout. But the CD option also involves very little know-how from the first-time investor; it's hands-off throughout its duration and it's flexible to meet many people's needs, whether you're a high roller or just a thrifty Average Joe. If you're considering this option, it may help you make up your mind to not only understand how the certificate of deposit works, but to also be given an example of what the terminology and arrangement mean. Find both below.

Overview of a Certificate of Deposit

A certificate of deposit is an arrangement between you and a financial institution whereby you commit a flat rate of money to them for a fixed amount of time. They commit to you an annual interest rate, possibly based on how much money you're putting forth, but more commonly based on how much time you're willing to commit it. Because the bank is able to move your money around while it's in the bank's hands, they stand to capitalize on your funds. For allowing them to do this, they're willing to offer you a higher interest rate than they would offer if you were just putting the money into a stagnant savings account that the bank cannot access. However, allowing the bank to move your money does not put it at a higher risk than if the money were in a savings account because the bank itself should be protected federally, guaranteeing all patrons the right to access not only their own money but the sum the bank promises. The only downside to a CD rather than a savings account is that you can't touch your money until it reaches the agreed-upon maturity date, when your contract is finalized or renewed.

Example of a Certificate of Deposit

Let's say that you have about $1,000 to invest; one of the many appeals of the CD investment strategy is that it doesn't have to be a gigantic sum to get started. Now that you know how much you have to play with, you have to think about how long you want your money to be tied up and out of your hands. You may find an arrangement where you can earn more money the longer you keep your money in your account. So let's say that you can either earn 2% over the course of five years or 2.5% over the course of ten years, with interest compounded annually (please note that these numbers are being used for demonstration's sake - and to make math easier - and they do not represent the market's current averages in any way). This means that you can walk away with $1,104.08 sooner or $1,220.08 if you have a decade to invest - more than double the earnings on the same base amount of money. In a savings account, you might earn 0.5% over any course of time because it's both lower to begin with and less negotiable purely based on timeframe. Looking for an even better demonstration of what your personal situation means? You can use a certificate of deposit calculator to play around with variables until you find an exact solution that appeals to your exact, specific income and financial obligations.




T.M. Murphy is a professional writer who lives in NYC. She currently specializes in fashion, beauty, marketing and finance articles. For easy-to-understand financial and banking advice to use on topics such as a certificate of deposit, she often turns to http://www.discoverbank.com. T.M. Murphy has been writing full-time since 2006, when she graduated with a B.A. in English from Northeastern University.





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