High-Yield CD: How It Works. Today we are going to be taking a look at a type of savings account that is called a high yield CD, or certificate of deposit. If you have not heard of it before or you have and you want to know how it works, you are on the right path.
High-Yield CD: How It Works
Our focus in this article is to say, High-Yield CD: How It Works. We are going to consider everything that makes it a high-yield CD and more in this article today.
What is a CD?
A CD, which is also called a certificate of deposit, is a type of savings account just as we have stated above. However, this type of savings account is usually locks the money in the savings account for a fixed period of time so that the individual having the account can have higher interest rates.
What this basically means is that your service account money will not be touched for a period of time. In exchange, we will have higher interest rates on the money in the account monthly. You can also be defined as a type of service account with a fixed interest rate and term.
High-Yield CD: How It Works
There are various types of CDs or certificates of deposit accounts that you can open. One such is what we call the high-yield CD. When anybody talks about a high-yield CD, the person is basically referring to a CD that has the highest interest rate of all the financial institutions. Any CD with the highest interest rate is considered a high-yield CD.
That being said, what determines the high-interest rates of a high-yield CD is a factor that varies over time. The cause of this is that banks and other financial institutions adjust their rates according to the direction of the Federal Reserve. Opening a high-yield CD means that the account has been locked into a specific term with higher interest rates.
The terms of a CD can be from 3 months to 5 years. In this timeframe, the money in the savings account cannot be touched by the owner of the account. On the bright side, CDs are insured by the federal government for up to $25,000.
Features of a high-yield CD
In order to determine a high-yield CD, there are certain features that you need to take a look at that are common to all high-yield CDs. Some of these features are listed below.
- High-yield CDs are mostly available at online banks and credit unions because the other ones can’t afford to offer them to their customers.
- Of course, being a high-yield CD means that it is going to have a high-interest rate. When a CD rate is well above the national rate, it is considered a high-yield CD.
- A high-yield CD account does not require a large deposit to be made. They usually require a minimum deposit of less than 5000 dollars.
Above are some of the features of a high-yield CD that can be used to distinguish these types of CDs from any other type.
Advantages of High-Yield CDs
There are some advantages to opening a high-yield CD instead of going to invest in other types of investments such as stocks and more. Some of the advantages are listed below:
- It provides a secure means of investment within a specific time frame. All CD accounts are insured for up to 250,000 dollars by the FDIC. Should the account not survive, you will be reimbursed for the sum of 250,000 dollars.
- Another advantage is that it has a much higher yielding interest rate than a standard CD. The interest rate of the highest CD is usually double that of the national interest rates, which is not so for all types of investments.
Disadvantages of a High-Yield CD
Just as there are certain advantages to having a high-yield CD, there are also disadvantages to them. Some of the drawbacks are as follows:
- Many people cannot wait for the term of the high-yield CD to be over, so they usually draw some of the money in their high-yield CD account, which leads to penalties.
- Penalties on a high-yield CD can be as large as a percentage of the interest you get from it.
How Are CD Rates Determined?
As I have mentioned above, the rate of a high-yield CD or any other type of Sydney is directly determined by the Federal Reserve board. The rate can be determined based on a good number of factors that cannot all be mentioned. The rate of a CD is always determined every 6 to 8 weeks when the Federal Open Market Committee (FOMC) decides if to increase, decrease, or leave as it is the federal funds rate.
If you are wondering what the federal funds rate has got to do with your interest rate on your CD, The federal funds rate directly determines how much interest rate will be paid to you by your bank as an interest rate on your high yield CD or any other type of CD.
How do I Open a High-Yield CD Account?
Opening a CD account can be done with any bank because most banks offer at least one type of CD for customers to use. But as previously mentioned in this article, high-yield CDs are mostly offered by online banks. If you want to open a high-yield CD account, you should look into online banks. In addition, you can also look at your brokerage account to open a CD account.
How does a CD gain interest?
CD interest works the way it normally works on a regular savings account. Which is that the bank pays you an interest rate on your deposit, which is made to your CD account, which you are not allowed to touch for a specific time frame, which is usually called the term. Payment of interest rates usually takes place at regular intervals such as months, weeks, and others.
What is the difference between CDs and high-yield savings?
There is only one major difference between CDs and high-yield savings. In savings with a CD, your cash is expected to go in touch until the maturity date or the term of the CD is over. However, in a high-yield savings account, the money in your account can be accessed at any time that you like.