| Certificate of Deposit CD |
What is Certificate of Deposit CD?
A CD in the world of personal finance is not a compact disc but a certificate of deposit. You buy a CD from a bank or savings & loan for some amount of money, and the bank promises to pay you a fixed interest rate on that money for a fixed term. For example, you might buy a 30-month CD paying 3% in the amount of $5,000. A bank may have a minimum amount for issuing CDs like $1,000, but there is usually no requirement to buy a CD with an even amount. Interest earned by a CD may be paid monthly, quarterly, annually, or when the CD matures. Interest paid during the CD's term is paid by check or deposited to another account; it is never added to the amount of the CD (like in a savings account), because the CD amount is fixed. After you have purchased a CD, you can always redeem it before the stated maturity date. However, if you cash out early, the bank will impose a penalty in the amount of 3 or 6-months of interest payments, depending on the term. This "penalty for early withdrawal" is due whether any interest was paid or not.
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