A certificate of deposit, or CD, is an investment tool that locks in a set interest rate for money deposited for a specific period. The interest rate on a CD is often higher than that of a money market account or regular savings account. CDs are regarded as conservative investments since their rates of return are often lower than that of other investments.

The year 2010 has seen extremely low interest rates, which makes CDs a less attractive investment. An important note is that CD holders do not have access to their money during the length of the CD. In general, CDs are good short-term investments but mutual funds are better over the long-term.

One of the drawbacks of a CD is that its rate will not increase if the interest rates rise, whereas the rate on a money market account will. However, the opposite is also true, important in this economy. If inflation rises, CD rates do not always keep pace. This could be a concern in the future due to predicted inflation increases.

Some CDs automatically roll into a new one when their period expires. The new CD will carry the current market rate of interest so investors should mark the CD term ending date and withdraw the money to invest elsewhere, if desired. Other CDs pay the interest to the holder on a quarterly or monthly basis or at the end of the CD term.

CDs are a safe investment so conservative investors may want to consider these. They can be purchased at a physical bank, online bank, or brokerage. Whether a CD makes a worthwhile investment is based on the interest rate and its relation to the inflation rate. If the CD is not federally insured and its rate is not above the inflation rate, it is not a worthwhile investment.

Keep learning more:

1. Best CD Rates: How To Find The Best CD Rates


2. Are Savings Accounts Worth It?


3. TIPS 101: Treasury Inflation Protection Securities


4. Inflation is the Biggest Risk of Bond Investing


5. The Advantages of Investing in Bonds


6. How Much of Your Portfolio Should Be in Bonds?


7. The 3 Basic Types of Mutual Funds

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