Estás leyendo la prensa de bolsa del futuro | ¿Aún compras prensa escrita para leer sobre Economía?
Find:

CERTIFICATE OF DEPOSIT

Published by sam - 29/08/07 - 08:08:49 am

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

A certificate of deposit (CD) is a promissory note that you receive from the bank.  In return for your loan, the bank promises to pay you a fixed rate of interest (or, sometimes, a variable rate) for the term of the loan and to return your principal and interest at the end of that period.  While CDs pay higher interest rates than do regular  savings accounts and provide the security of FDIC protection, they tie up your money for the term of the certificate.

Interest vs. Liquidity
The fact that the interest rate on a certificate of deposit is fixed and unchangeable may turn out to be either an advantage or a disadvantage.  When interest rates are at a peak, a bank will have to offer certificate at a fairly high interest rate to attract buyers.  If you buy a long term certificate at that time, you will lock in a high rate, and continue to receive that the rate even if interest rates drop precipitately.  Conversely, if interest rates are low at the time of your purchase, you will lock in a low rate for the entire term of the certificate.

If you withdraw a certificate of deposit before its term ends, you are likely to pay a penalty.  Federal law no longer mandates penalties, but banks have the right to impose their own, and some of these can be severe.  The loss of three month’s interest is not uncommon.  You should check on the bank’s early withdrawal policy before buying a certificate of deposit, and if you find the penalties too severe, look elsewhere.  In some situations, if you find yourself locked in to a low-rate certificate of deposit, it may be worth paying a moderate penalty to free your funds for a more productive investment. 

When a certificate of deposit matures, you have several choices.  The bank can renew if automatically—but at the rate prevailing at the time—or deposit the proceeds into a regular savings account, or mail you check.  Since some banks choose one of these options automatically unless you instruct them otherwise, it is important to take action before the certificate matures.

Certificates of deposit are available with a variety of terms from as short as seven days to as long as 30 years.  But the most common terms are three months, six months, and one, three and five years.  Because banks are eager to retain their depositor’s money over a long term, the interest rate rises with the length of the term.  And because the banks profit more from large accounts than from small ones, the rates rise with the denomination of the certificate. A certificate of deposit for $2,000, for example, may command a rate half a percentage point higher than one for $500, and higher denominations.  A certificate of deposit for $2,000, for example, may command a rate half a performance point higher than one for $500, and higher denominations may earn still higher rates.

Predicting Interest Rates
In the belief that they can predict interest rates, some depositors buy the largest long term certificates of deposit they can afford when they think rates are peaking.  They hope that they have locked in a higher rate than those that will prevail in the near future, when they anticipate that rates will decline.

Others, however, are convinced that interest rates are totally unpredictable over the long term.  So instead of investing,say,$5,000 in a one year certificate of deposit at a specific rate, they buy five $1,000 six month certificates at intervals of three to six months.  With this method, one certificate will mature every three to six months, at which time they can consider current interest rates and other investment options for each $1,000.  This tactic precludes the possibility of locking in a high rate, but it also precludes the equal possibility of locking in a low one.

Some banks offer variable-rate certificates of deposit, but these sacrifice the advantage of locking in a high interest rate for a long term.  In addition, the variable rate of some certificates is not tied to any specific index, and can be changed at the bank’s discretion.  In general, variable rate certificates are a poor buy unless they incorporate a rate floor—that is, a minimum below which the rate will never fall.

Finding the Highest rates
Rates on certificate of deposit vary not only with the term of the certificate and its denomination but also from one bank to another, and often from one region to another.  There is no need to confine your purchase to the bank that handles your other accounts or even to a bank in your own community.  Many Banks advertise their certificates of deposit to a nationwide audience through the media, and sending $10,000 mail or bank wire to a bank thousand miles from your home is a relatively simple matter.

Regional rate differences as much as half of a percentage point are common because banks in some parts of the country experience a need for more funds—for mortgages, for example, in areas of high population growth.  In addition, at certain times of the year—before the Christmas holidays and before income tax deadlines—banks may need funds to replenish those withdrawn by their depositors.  All banks, no matter where they are located, continuously compete with one another, as well as with the financial institutions discussed in chapter 5.  One way of attracting new customers is through a  certificate of deposit price war.  In this struggle, it may be cheaper for a small bank to attract depositors by means of higher CD rates than by trying to match the expensive advertising campaigns of its larger competitors.

It is also possible, to some extent, to negotiate or bargain with your local bank.  Because some banks give their officers a range of rates rather than a single rate for certificates of deposit, you might try bargaining for a better rate—or a waiver of withdrawal penalties—instead of accepting the terms posted in the bank lobby.

Artículos relacionados

No Comments »

RSS feed for comments. TrackBack URI

Leave a Comment

XHTML: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>

Welcome to Personal Money Management Expert,the blog where you can find advices to save money and to earn more with each dollar. If you want, it's possible to suscribe by mail and receive all news by e-mail.

E-mail:

Este blog funciona gracias a WordPress | Condiciones de uso de los contenidos | Responsabilidad
Entradas y Comentarios feeds. XHTML y CSS válidos.