A certificate of deposit (CD) is a savings certificate that allows the buyer to receive interest over time. Every certificate of deposit bears a maturity date on which the debt becomes due for payment along with interest. The maturity period varies depending on the agreement made between the customer and the bank/financial institution. Maturity periods on certificates of deposit range from a few weeks to several years. The more the maturity period, the higher the interest rate earned by the investor. The buyer cannot withdraw the amount under CDs before the maturity period is up. The money should remain in the account with the bank until maturity. Such withdrawals before maturity are subject to a substantial penalty. For example, the penalty will be the loss of six months' interest if it is a five-year CD. However, brokered CDs that can be sold off in the secondary market through brokers or dealers are not subject to any penalty fee if they are sold prior to maturity date. But in case of indexed CDs, the investor cannot sell it in the secondary market before maturity. An indexed CDs rate of return depends on market index. This illiquid nature of a CD before the maturity period can be overcome through CD Laddering. CD laddering is the process of purchasing several CDs at one time with different maturity dates of one year, two years, three years, four years, and five years. In this CD ladder one certificate matures every year for the next five years. For example, lets say that a customer has $10,000.00 to invest. He can buy 5 CDs for $2,000 each with different maturity dates mentioned above. That means the customer has a $2,000 CD maturing in one year, another in two years, and so on up to the last one, which matures in five years. Whenever a certificate matures, the customer rolls it over into another CD. This strategy allows the customer to take advantage of higher rates of interest while still retaining frequent access to part of their funds. CDs require the buyer to be patient before collecting on their investment. It is necessary to wait until the maturity date to make a profit. It is best not to constantly think about a CD, and just let it accumulate interest until it is mature. |
