CDs are time deposits – you agree to place your funds on deposit with the bank issuer for a stated period of time. During the term of the CD your funds earn interest at a stated interest rate or based upon an agreed method of calculating the rate, such as the percentage increase in the stock market.
Because you agree with the bank to keep your funds on deposit for a period of time, CDs may offer you a higher rate of interest than other types of deposit accounts that allow you more immediate access to your funds, such as checking and savings accounts. Generally, the longer you are willing to let the bank keep your funds, the higher the interest rate you will receive on your CD.
Most banks are members of the FDIC, a government agency that insures bank deposits. You are eligible for $250,000 of deposit insurance for all the deposits you own at one bank in each recognized ownership capacity. For example, all the deposits (CDs, checking accounts, etc.) you own at one bank in your own name are insured up to a total of $250,000. You are eligible for an additional $250,000 for all deposits you own at one bank in joint accounts and another $250,000 for Certain Retirement Accounts (includes IRAs).
The FDIC’s brochure "Your Insured Deposit" explains deposit insurance coverage in more detail. You can obtain the publication from the FDIC and from most banks and securities brokers. You can contact the FDIC by mail (550 17th Street, N.W., Washington, DC 20429), by phone (800-276-6003) or by e-mail. You can also visit the FDIC web site.
What are the Features of CDs? All CDs do not have the same features. Banks may offer CDs with different maturities (i.e., three months, one year, five years), methods of determining interest and payment features. Banks are not required to permit you to withdraw your funds prior to the CDs maturity, even if you were to pay a penalty. If early withdrawal is permitted, there are no strict guidelines governing the penalty that a bank may impose.
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 the "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.
The Federal Reserve Board’s brochure, "Making Sense of Savings", explains the APY and other disclosure requirements. You can obtain the brochure from the Board by writing to: Publications Services, MS-127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or calling 202-452-3244) or on the web site of the Federal Consumer Information Center.