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Understanding CDs |
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Whether you are a conservative, moderate or aggressive investor, you probably allocate a portion of your investment portfolio to "secure" investments that provide maximum safety. Bank deposits have a special role in the economy as a significant source of funds for banks, savings and loans and thrifts. Banks lend money to businesses, homeowners, corporations and others for years at a time. In order to balance their assets versus liabilities, they must also attract funds that will remain on deposit for a fixed term.
Certificates of Deposit (CDs) are, quite simply, "time deposits" that earn a contractual rate of interest over a specified period of time. Investors agree to lend money to a bank for a fixed period of time and, in return, the investors receive a stated rate of interest, paid in various installments, over the life of that "loan". Because investors give up the right to withdraw their money at any time, they receive a higher interest rate than on demand accounts, such as checking, savings or money market accounts.
Investors commonly allocate a portion of their "safe" money to CDs. CDs are known for their safety because principal and interest are backed by the full faith and credit of the U.S. Government through the Federal Deposit Insurance Corporation (FDIC). FDIC insurance currently provides protection up to a maximum amount of $100,000 (including principal and interest) for all deposits held in the same capacity per depositor, per institution.
When selecting a CD you should carefully review its terms and conditions. The Federal Truth in Savings Act requires all FDIC-insured depository institutions and deposit brokers to disclose certain information to you when advertising the rate on a CD. The information must include "Annual Percentage Yield" or "APY" (the rate that reflects the amount of interest you will earn on your deposit), the maturity, the minimum required deposit and whether there is a penalty for early withdrawal. Other significant features, such as the right of the institution to redeem or "call" the CD, must also be disclosed.
| | How to read Bonds.com CD offerings: | Term | Qty | Issuer | Coupon | Pays | APY | Maturity | Call Date | Set Date | Price | Cusip | Restrict | | 10NC1 | 7.16MM | ABC BANK | 6.00 | Mon | 6.0 | 5/19/2016 | 5/19/2007 | 5/19/2006 | 99.100 | 1234ABC56 | OK,TX |
| - Term:
10 year CD, non-callable for 1 year.
- Quantity:
Amount available.
- Issuer:
Bank raising deposits.
- Coupon:
Stated interest rate.
- Pays:
When interest will be paid (monthly, quarterly, or annually)
- APY:
Annual Percentage Yield, the rate that reflects the amount of interest you will earn on your deposit
- Maturity:
The date on which the CD's principal is repaid to the investor and interest payments stop.
- Call Date:
The date a bond may be redeemed prior to maturity at the option of the issuer.
- Settlement Date:
The day on which the buyer will take possession and the seller will deliver a security traded between the parties. The first day an interest-bearing bond will begin accruing interest.
- Price:
Dollar amount to purchase the CD. The price is stated in 100's and trade in $1,000 par value value amounts. (99.10 = $991 per $1000)
- Cusip:
Identification number assigned to brokered CDs by the CUSIP Service Bureau to identify the issuer and the issue.
- Restrictions:
States where the CD can NOT be sold to investors
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