Comparing CDs

When you shop around for a CD, ask the following questions.
As with the other investments I discuss in this chapter,
talk to at least three different institutions before you take
the plunge.

What’s the minimum deposit to open the account?

Usually this amount is $500.

What’s the interest rate? What is the compounded
annual yield? Interest is the percent that the bank pays
you for your allowing them to keep your money. The
rate of interest is also called yield. Compounded annual
yield comes into play if a bank is paying interest monthly,
for example. Once the first month’s interest is credited
to your account, that interest starts earning interest, too,
meaning that the compounded annual yield is slightly
higher than the interest rate.

 How often is the interest compounded? Remember,
the more frequently it’s compounded, the better it is for
you. Continuous compounding is best.

 Is the interest rate fixed or variable? Make sure that
the institution offers you a way to get current interest
rates quickly and easily — by phone, for example.

 Can you add to your fund at a higher interest rate if
the rate goes up while your money is invested? If the
rate goes up substantially, and you can add to your fund,
then you can significantly increase your yield.

 What’s the penalty for early withdrawal? These penalties
can wipe out any interest you earn.

 What happens to the deposit when the CD matures?
Does the institution roll a matured CD into a new one
of a similar term? Does it mail a check? Credit your
checking account?