In case some of you aren’t quite familiar with CDs (Certificate of Deposit), I thought I’d put together a little introduction to CDs for the latest Carnival of Personal Finance.

A certificate of deposit (or, more commonly referred to as a CD) is a financial product offered by banks and credit unions that allow you to lock in a guaranteed interest rate for a certain time period, ranging from 3 months to 5 years. They are FDIC insured and as a result virtually risk free.

CDs are different from your traditional savings account in that they have specific time periods till maturity as well as fixed CD rates. If you choose to withdraw your money before the CD has matured, you will oftentimes be required to pay a penalty, sometimes even causing you to lose money. As a result, it is important to pick an appropriate term when choosing a CD. After the CD matures, you have the option of withdraw the principle and accrued interest, or “rolling over” the CD and reinvesting in another certificate of deposit. However, this new CD’s rate depends on market conditions.

CD’s typically require a minimum deposit. This can range anywhere from $1,000 to $100,000 on a “Jumbo CD“, depending on the CD’s term as well as the CD rate. In the past, a longer term and higher principle tends to yield the highest rates. However, as interest rates seem to have recently plateaued, you will find many short term CDs with higher rates than long term CDs. In addition, with the advent of online banks such as HSBC Direct, FNBO Direct, and ING Direct, minimum deposits on some great CD’s have been lowered to $1,000.

The highest CD rates are currently offered by online banks and local credit unions. You definitely won’t find the best deals at your local banks. In fact, most brick and mortar banks tend to dissasociate themselves from their online divisions. This is because they offer lower rates in their physical locations, and would rather have their local customers open CDs with lower rates.

With interest rates constantly fluctuating, a good way to diversify is to employ the “CD Laddering” strategy. This strategy helps the investor hedge against fluctuating interest rates while also maintaining some degree of liquidity with their CD investments.

CD’s are generally FDIC insured up to $100,000. Of course, you should always check each individual bank to make sure. Joint accounts are insured up to $200,000, and IRA CDs are insured up to $250,000.

Well, that’s all I’ve got for you today; I hope you learned a thing or two about certificate of deposits! If you have any questions don’t hesitate to contact me. Remember to visit ThePiggyBanker.com for the latest bank deals and best bank rates!