Monday, March 29, 2010
When it comes to purchasing CDs there
are a many obvious benefits. The most noticeable benefit is the much
higher interest rates than a regular checking or savings account. One
of the greatest benefits to purchasing CDs over other forms of
investments is that they are almost always insured. This insurance
allows investors to recoup any losses if the bank should fail up to
$250,000. The last benefit is that CDs are considered as low-risk.
The way this is accomplished is because each person who purchases a
CD will get a predetermined calculation on the worth of their
investment, regardless of changing interest rates or if the bank
fails.
Drawbacks
CDs are considered a sound investment,
but they are not perfect, and do come with some drawbacks. This type
of investment is not known to offer high returns, even though they
are protected from the fluidity of rising and falling interest rates.
This is why they are used as more of a short-term investment option.
It is important to remember that with the low risk comes the low rate
of return.
If the potential purchaser would like
to have a higher rate of return, but still keep the risk to their
investment as low as possible, he or she can opt for a long-term CD,
which usually carries a higher rate. While the risk is low even with
longer-term CDs the investor does run the risk of rising interest
rates during their investment period, which can result in being stuck
with a lower interest rate until the CD matures.
Remember that this type of investment
does carry major withdrawal penalties. This can result in the
purchaser not only losing the interest that has incurred but some of
the principle as well.
Provided by the Insurance Rates Website.