When you buy a certificate of deposit (CD), you're actually signing a loan agreement with a bank. You're the lender, and the bank is the borrower. The loan has a fixed term time, and the bank pays interest on the debt until you've been repaid in full. You can sometimes cash in a CD before its maturity date, but doing so will likely erase a good amount of gains.
Some CD terms last for just a few days, while others last for several years. Generally, the longer the term, the higher the rate. You receive a CD or time-deposit agreement when you open the account. This document includes details such as the interest rate and the maturity date. Many CDs are automatically renewable, which means your mature CD rolls into a new CD term if you don't withdraw your money during a seven- to 10-day grace period at the end of the CD term.
Most banks and credit unions require you to pay a premature withdrawal penalty if you access CD funds before the account reaches maturity. Many institutions charge a penalty equal to three months of interest on CDs with a term of less than a year. The penalty usually rises to six months of interest on CDs with a term in excess of 12 months. However, penalties vary between institutions, and these fees can cut into both your interest and principal.
Some banks sell no-risk CDs; you don't pay any penalties when you withdraw cash from these accounts. In some instances, you can make withdrawals at set intervals during the CD term, while some banks allow you to withdraw some or all of your cash at any time. No-risk CDs are attractive if you want easy access to your cash but also want to earn more interest than you can get on a regular savings account. However, you pay a price for liquidity, because no-risk CDs often pay lower rates of interest than standard CDs.
Some financial institutions sell CDs as securities through investment firms. In some instances, these accounts are marketable, which means you can sell your CD to another investor before it reaches maturity. When you do so, you may make a profit, take a loss or get back a sum of money equal to your original investment. Other brokerage CDs are non-marketable, which means you're stuck with your CD until it reaches maturity. Generally, brokerage CDs are non-renewable, which means the account automatically liquidates when it matures.
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