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Question:


What is a CD? Is it a good investment?
-Trout48910


Answer:


A CD – certificate of deposit – is simply a bank deposit paying interest for a fixed term, typically six months to five years, at a fixed rate. CDs used to be considered investments when they had yields that at least kept pace with inflation. But with the Federal Reserve maintaining its zero-interest-rate policy and doing it quite effectively, they pay next to nothing on shorter maturities – the typical one-year CD recently yielded roughly 0.9 percent, according to Bankrate.com – and not much more over longer holding periods, for instance about 1.5 percent on five-year deposits. And if depositors withdraw their money early, penalties can be substantial, sometimes as much as six months of interest. CDs are federally insured, so it’s virtually impossible for depositors not to get their money back at the end of the term, but with inflation running at just over 2 percent for the last three years, the money that they get back at the end of the term plus accrued interest is likely to buy less than it did when they put their money in the bank. By any reasonable definition, that’s a bad investment.

-Conrad de Aenlle



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