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How to invest CD yields

When purchasing a certificate of deposit, there are three options for how interest can be paid: check, transfer and capitalized. What does the third option mean?

If the interest payments are paid out periodically to you by means of a check or transfer, then it's up to you to reinvest the money.

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What you actually earn over the term of the CD will depend on what interest rate you earn on the reinvested interest payments.

With this method of interest payment, it's not likely that you would earn the annual percentage yield, or APY, on the CD.

Your yield could be higher or lower depending on the reinvestment rate.

The bias would be toward a lower rate since you're dealing with both smaller amounts of money and shorter amounts of time.

Capitalized interest payments means that the interest payments become principal (capital) as they are credited to the account.

The interest payments then start earning the CD rate. This is the assumption that is used when calculating the APY on an investment.

Bankrate.com's corrections policy
-- Updated: Nov. 17, 2005
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