A CD, or Certificate of Deposit, is a common fixed-income investment offered by banks and credit unions. CDs are more often used for short-term savings than long-term investing.
CD’s typically (but not always) have the following characteristics:
- Fixed interest rate
- Fixed term between one month and seven years
- FDIC/NCUA insured up to $250,000
- Higher interest rate with higher principal
- Higher interest rate for longer term
- Higher interest rate from smaller banks/institutions
Advantages
- Typically offer higher rates than savings and money market accounts
- Choices in term that best fits your time horizon
- Can be laddered (explained below)
- More flexible than bonds
- Many types of CD to fit your needs (traditional, liquid, zero-coupon, bump-up, high-yield, etc.)
Disadvantages
- Penalty for early withdrawal (before maturity)
- Not as liquid as savings and money market accounts
- The longer your term, the better off you might be with savings bonds
Exceptions
- Not all banks and credit unions are FDIC/NCUA insured, usually offering higher rates for more risk
- Preceding a recession we can get something called an inverted yield curve, where long-term rates and lower than short-term rates for instruments of the same quality.ย This comes from higher demand of long-term rates in anticipation of lower rates.
