What is a Certificate of Deposit (CD)?
A certificate of deposit (CD) is like a loan from an investor to a bank or similar thrift institution. It is issued by these banking institutions and pays interest. CDs are among the most widely used money market instrument by investors overall. They are issued for varying maturities, and earn interest based on this maturity. The most common CDs include 31-day and 91-day maturities. For these CDs, the yields are tied to the 13-week Treasury bill rate. Six-month and 30-month CDs will generally yield higher rates, and they are also tied through some formula to Treasury bills. They are useful for the average investor because they are available in sums as little as $100. Bank CDs can be tailored to meet your individual requirements, as well. They are one of the most flexible investing tools. CDs are like bank deposits and are covered by federal insurance up to $100,000 per account.
"Jumbo" CDs
Jumbo CDs are often used by institutional investors and other heavy-duty investors. They have a minimum of $100,000 and therefore subject the investor to added risk not covered by the federal insurance. Jumbo CDs allow investors to obtain capital gains due to fluctuations in interest rates, but this tends to be a very sophisticated, high-level process for the individual investor.
"Designer" CDs
There have been many changes in the banking system in the last few years that have made possible a variety of options for CD investors. Interest rates vary with the length of the CD that you purchase. Longer maturities and larger CDs generally pay higher rates. Now it is possible to find practically any combination of maturity/CD size to meet investors’ needs in what are called “designer” CDs. These types of CDs are offered by many savings institutions and allow investors to invest whatever sum they want in the form of a CD. If an investor has an odd sum of money available for investment, he/she can obtain a CD built specifically around their requirements.