About Certificate of Deposit Rates

By Kent Ninomiya

  • Overview

    Certificate of deposit (CD) rates vary depending on the financial institution, amount deposited and length of deposit. A financial institution agrees to pay the customer a set amount of interest over a set period of time. In exchange, the customer agrees to deposit a specific amount of money in the financial institution for that period of time.
  • Certificate of Deposit Rates

    Financial institutions advertise their certificate of deposit rates to entice investors to deposit money with them. Certificate of deposit rates are stated as both the interest rate and the interest yield. The interest rate is the percentage of interest that the certificate of deposit pays. The interest rate yield is the amount the certificate of deposit actually grows over the course of 1 year. They are different because of compounding interest. Every time interest is paid, the size of the account grows. When interest is calculated again, it is on a slightly larger amount, which results in slightly more interest. As the process repeats, the interest yield gets larger compared to the interest rate.
  • Certificate of Deposit Amounts

    Certificate of deposit rates increase as the amount in the account increases. Most financial institutions have tiers for their certificates of deposit. The higher the deposit, the higher the certificate of deposit interest rate. For example, a financial institution might pay one-tenth of a percent more in interest for a $50,000 CD compared to a $10,000 CD and another tenth of a percent for a $100,000 CD.

  • Certificate of Deposit Terms

    The longer the term of a certificate of deposit, the more interest it pays. Financial institutions also have tiers for certificates of deposit lengths. For example, the interest rate paid on a 6-month certificate of deposit might increase by one-tenth of a percent for a 1-year certificate of deposit and by a full percentage point for a 5-year certificate of deposit.
  • CD Rates and the Prime Rate

    Certificate of deposit rates reflect the performance of the entire economy. They are pegged on the prime rate from the Federal Reserve Bank. When the Federal Reserve Bank raises its interest rates, certificates of deposit rates rise at financial institutions across the country. When the Federal Reserve Bank cuts rates, CD rates fall as well.
  • Certificate of Deposit Maturity

    Because a certificate of deposit is an agreement with a maturity date, there are penalties for breaking that agreement. If you withdraw the money deposited in a certificate of deposit before the maturity date, you will probably have to forfeit some or all of the interest earned. Be sure to read all the details of your certificate of deposit agreement before you invest. Make sure you won't need that money before the maturity date.
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