CD Rates: Rules and Regulations



Posted: Wednesday, December 28, 2005

by Jason Gluckman

People who wish to invest in certificate of deposit have to approach a bank or another financial institution that offers CDs. Consumers who open a CD may receive a bankbook or paper certificate. Banks now simply enter the amount as a distinct category of deposit in the periodic statements of the customers rather than separately issuing certificate. The purchaser of the CD should read the terms and conditions of the institution with respect to CDs very carefully before buying it.

Like any other investment, CDs carry a fixed rate of interest, which depends on the maturity date of the CD. The longer the maturity period, the higher the rate of interest. Some banks offer compounded interest in which the interest earned is added to the total amount of the CD, allowing the customer to earn more. On the other hand, if the customer wants to have the interest periodically, it will be transferred to his account by the bank authorities. CDs can be sold in multiples of dollars. They are credited in the investor's account in terms of units. For example, if the purchaser of the CD proposes a Rs.1 crore issue, then 100 units will be credited in the his account.

Just shortly before the CD matures, the institution sends a notice to the CD holder requesting directions as to whether to repay the amount or to “roll over" the CD automatically. Rolling it over means depositing the amount of the previous CD along with the interest into a new CD. In the absence of any directions by the customer, it will be the practice of the bank to “roll over" the CD.

Early withdrawal of the amount by the customer before maturity is subject to a substantial penalty fee, which may be the loss of six months' interest if it is five-year CD. The institutions offering CDs generally provide insurance coverage through public insurance or private insurance companies. The level of insurance is governed by FDIC and NCUA rules.

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