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A certificate of deposit is what would happen if a bond and a savings account got together and had a baby. On the one hand, CDs have a maturity date and a stated interest rate, like a bond. But unlike a bond, CDs come with a guarantee that promises you won't lose money even if the bank goes belly up.
The Federal Deposit Insurance Corp., or FDIC, insures deposits at banks for up to $250,000 per depositor, including CDs. That's a promise that won't come with other fixed income instruments, except U.S. Treasury securities which are backed by the federal government.
Of course, safety comes at a price -- a dear one these days. CD rates are at record lows thanks to the Federal Reserve and CD rates are at the bottom of the barrel because they're safer investments. Investors looking for higher yields have been forced to take on more risk than they otherwise would, and that means making investments that could lose money.
It's not impossible to lose money in a CD. Most come with an early withdrawal penalty, which can entirely negate years' worth of interest and even bite into principal if it's a steep enough penalty.
Before buying a CD, check the terms and conditions to make sure the penalty isn't too onerous, just in case you need the money before the CD matures.
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Follow me on Twitter @SheynaSteiner.
Thanks Sam, good point about inflation!
Hey Sheyna,
Good article, but I would like to make one addition. CD's are a great safe investment and do have very low yields. In terms of the actual investment, it will not drop below the initial deposit. However, in terms of buying power you are losing. CD's currently are not close to pacing inflation so you are losing purchasing power, but not monies.
Keep up the great work.
Sam