How Are CD Rates Determined?
A certificate of deposit (CD) is basically an agreement where where you loan your own money to your bank for a fixed amount of time in return for a guaranteed fee, which is the CD interest rate. CD interest rates are usually determined by two different factors:
- The time it takes until your CD matures.
- The current interest rate environment.
If you decide to loan your money to the bank, the bank then invests your money by loaning it to some purchasing investments such as stocks and bonds which would earn you more money. The bank also loans your money out to other customers, which in turn earns a certain percentage which is the interest rate. That means a bank CD rate is also influenced by how much your bank anticipates it can earn with the money you have loaned.
In general, you’ll receive a higher CD rate if you increase the duration of time your CD remains on deposit or the size of your deposit.
You should understand the advantages and disadvantages associated with certificate of deposits before opening a CD.
Certificates of deposit offer numerous advantages over other types of investments:
- Not susceptible to fluctuations in the stock market.
- They are one of the safest investments you can choose.
- Provide you with a guaranteed return on your money.
With its advantages it also comes with a few disadvantages which are:
- Cant withdraw your money till CD matures.
- If you need to withdraw money you must pay a penalty fee.
- Certificate of deposit also carry some interest rate risk due to the fluctuation of the economy.
Hopefully with the information provided, you will have the knowledge and understanding of certificate of deposits where you can make an educated decision on whether or not CD’s is the ideal investment for you.
This was a guest post by GoBankingRates.com. Find the best CD rates at GoBankingRates.com.
