Initial Investment
A certificate of deposit (CD) is an investment option that allows a person to invest money for a certain period of time to receive a higher interest rate than a standard savings account would offer. Because your CD is guaranteed by a bank or other financial company, you will leave the money with the bank for a given period of time to re-invest. Because of this, the bank is able to offer you a higher interest rate in return for the security of your money. When choosing a CD that is from an FDIC-insured institution (meaning you will not lose your initial investment), CDs are considered a low-risk investment.
Not all CDs are created equal. A person must carefully consider the amount he wishes to invest (typically in multiples of $1,000, and some banks have a lowest investment limit of $5,000 to $10,000) and the amount of time (term) he can comfortably leave it in the bank. This term is known as a maturity rate and refers to the point at which a person can withdraw funds from the CD without experiencing any penalties. For this reason, it's a good idea to confirm the following before turning over your funds: the CD's maturation date, your ability to withdraw funds early, how you will be paid and if your interest rate could ever change. If the terms are agreeable, you provide your funds to the bank.
While It's in the Bank
When referring to the maturity of the CD term, this means the time in which you have agreed to invest the CD and the returns you will receive at the end of the period. Let's say for example, you have invested $1,000 in a CD and will receive an annual 4 percent return on your investment for a period of five years. This means each year you will earn $40 in interest from the bank. However, banks mature the CD at a monthly rate. Therefore, the bank will pay a portion of the interest every month, equaling up to the $40 per year that was agreed upon.
A CD can reach maturation either by compounding interest or at a flat rate of investment. A flat rate investment means your CD will earn interest only on your initial investment. For the purposes of our example, this means you will earn $40 every year for 5 years (a total of $200 at maturation). However, compounded interest means you build each year on the interest earned from the year before. So, the second year, you would earn 4 percent interest on $1,040, and each year would be successively more. A compounded interest CD is a good example of why you should leave your CD in the bank for its agreed-upon time--because the longer you leave it in, the more money you will make.
Reaching Maturation
Once you have reached the agreed-upon point of maturation, you should have earned the interest you were promised, providing you kept your promise to leave the funds in the bank for the designated amount of time. The bank will typically offer you a check to refund your money and interest, or will offer to set up a savings account or a new CD. When this occurs, your CD has matured.
It is important to note the possibility of fees when withdrawing money early. Some financial organizations offer "no-call" CDs in which you do not experience penalties from taking your money out early. While these may not have as high a return, this flexibility could protect you from potential fees down the road if circumstances prevent you from allowing your CD to reach maturation.
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