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Secure Investment: Understanding Certificates of Deposit

March 19, 2009

By: Jim Oosterman
Melrose Bank

Does a certificate of deposit (CD) make sense for you? For some people, it is the regular interest payments they like. Others may prefer the security of the investment, while others are attracted to the flexibility of the time commitment required. Whatever the reasons, CDs are an important part of a diverse portfolio.

What are Certificates of Deposit?
Certificate of deposits are deposit accounts that generally offer a higher rate of interest than regular savings accounts, yet offer the same security. With a CD a set amount of money is invested for a set period of time, and interest is credited at periodic intervals, such as monthly, quarterly or semiannually. At the end of the CD term, called the maturity date, the original investment is returned to the depositor with any accrued interest.

Safety and Security
A CD is a very secure investment. The FDIC (Federal Deposit Insurance Corporation) insures deposits held at banks up to $250,000 per depositor. The Credit Union equivalent of this is the NCUA (National Credit Union Administration) which has the same deposit coverage limits. These are both federal insurances backed by the United States Government. Additionally, many banks and credit unions in Massachusetts carry deposit insurance for balances over and above the FDIC or NCUA limits. Look for signage and advertising to include DIF (Depositors Insurance Fund) for savings banks, SIF (Share Insurance Fund) for cooperative banks, or MSIC (Massachusetts Share Insurance Corporation) for credit unions. There has never been a penny lost in principal or interest in a Massachusetts insured financial institution CD, unlike money invested in the stock market or an uninsured mutual fund.

The Right Options for You
Selecting the right options can be the difference between choosing a two-seat, sporty car or a six passenger, functional minivan. What you select should be the right fit for your needs at the time. The most important options fall into two broad categories – interest rate and investment term.

Rate: The interest rate on CDs is expressed as an Annual percentage Yield (APY). APYs can be fixed or variable. Fixed APY CDs pay the same interest rate over their entire term. Variable APY CDs adjust periodically based on market conditions. Some CDs called bump-up CDs allow you to change the APY on your CD to a more favorable one, should interest rates rise before your CD matures. Banks usually limit the number of changes, or bumps, that you are allowed to make. You may have to accept a lower initial rate for this bump up privilege however. CD APYs for similar terms can vary greatly between financial institutions. Most banks and credit unions post their current CD rates on their websites. Many times, better rates can be found by doing a little comparison shopping before you invest.

Term: CDs offer great flexibility in how long a commitment is required. Specific terms vary by financial institution, but can range from as short as days or months, to as long as several years. Keep in mind there are often significant penalties for cashing in a CD prematurely. Some CDs allow surviving heirs to cash in the CD without penalty if the owner dies.

Before you buy any CD it’s wise to get the answers to these key questions:

  • What is the APY?
  • Is the APY fixed or variable? If it’s variable, how often does it adjust and by what criteria does it adjust?
  • What is the term (maturity date)? What are some other options and their associated APYs?
  • What are the penalties for early withdrawal?
  • How is the CD insured and how much of it is insured?

The last and most important question is one only you can answer. Is this CD right for me? If you’re an investor who would like to keep business local, CDs can be obtained at the very financial institutions where you have your checking and savings accounts. If you want to take Wall Street to Main Street, it can’t get much closer than putting your money into your neighborhood institution. Your local bankers will be happy to help you choose the right CD, or combination of CDs, that best fit your needs and goals.

James Oosterman is the Vice President of Melrose Bank. He can be reached by telephone 781-665-2500, online at or on Facebook at

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