"Certificates of Deposit -- the Benefits"

certificate of deposit income benefits

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Certificate of Deposit Advantages:

1. Safety of principal

Barring a national or international economic disaster or a terrorist take over or something similarly catastrophic, you'll get the entire amount of your money back at the end of the maturity period.

If your bank fails, the FDIC stands ready to make good your loss using the taxpayers' money.

2. Stability / predictability of income

Most savings certificates pay a fixed rate of interest to maturity. So you know that barring some catastrophe, you'll receive that amount of money each time it's due.

There are some variable CD where the rates of interest do change, but you should understand that when you buy them.

3. Higher rate of interest than ordinary savings accounts

Certificates of Deposit Must Pay You for Illiquidity

Because you're giving up access to your money, banks must reward you with a higher rate of interest. This makes up for their lack of liquidity. Savings certificates are a good deal for banks because they're better able to predict how much money they have available for long term loans. Savings accounts are too liquid for this purpose, since people can withdraw that money at any time.

Next: What are the risks of certificates of deposit / savings certificates

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