Certificate of Deposit is a debt instrument and it is purchased directly through the saving and loan institutions or Commercial banks. Certificate signifies that the investor deposited some amount of money at a specified rate of interest and for particular period of time. There are high interest rates than saving account because the money can not be withdrawn until the maturity. If you withdraw the money in between penalty will be charged. These securities are not traded publicly.
There are terms and conditions:
- The CD can be callable: According to this, before ending the term the bank or credit union can close the CD.
- Interest payment: Bank may pay interest as it may accumulated in the CD or it is accrued.
- Calculation of interest: The CD may start interest earning from the start of the next month or quarter or from the date of deposit.
- Right to delay withdrawals: Generally financial institutions have the right to delay withdrawals to stop a bank run for a specified period of time.
- Principal Withdrawal: Any withdrawal of principal or withdrawal of principal below a certain minimum closure of the entire CD. A IRA CD of US may allow withdrawal of IRA required minimum distributions without a withdrawal penalty.
- Fees: Fee may be assigned for closure or withdrawal or for providing a certified check.
- Automatic renewal: Before automatic rollover at CD maturity, banks may or may not send a notice. A grace period may be specified by the institution before automatically rolling over the CD to a new CD at maturity period.
