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Definition: Fixed Rate Certificate of Deposit
Certificate of deposits are time deposits, sold by banks, thrift institutions and credit unions in U.S. CDs are almost risk-free financial instruments, insured by Federal Deposit Insurance Corporation (FDIC) for banks and by National Credit Union Administration (NCUA) for credit unions. Due to their very low risk features, Certificates of Deposits are also low return products.
Fixed Rate Certificate of Deposit is for the conservative investors who want to be sure of the amount received at the end of the duration. The interest rate is fixed for the entire duration and is not susceptible to change, hence making it a very low risk instrument.
There are several kinds of CDs available, some of them are mentioned below:
• Liquid Certificate of Deposit – Early withdrawal of a traditional CD may attract a penalty. Liquid CDs are exempt of the penalty clause; however the interest rate is slightly lesser than the market interest rate.
• Zero Coupon Certificate of Deposit – These CDs do not pay annual interest amount. The interest is reinvested, hence adding to the value of deposit. The interest rate allowed is higher than the market interest rate, but the interest that is re-invested, is taxable.
• Callable Certificate of Deposit – Banks may wish to withdraw CDs in case the interest rate falls significantly than that offered originally, Callable CDs fulfill this criterion. Callable CDs can only be recalled after a set period and the bank has to return the principal along with the interest earned in that duration. A higher interest rate makes Callable CDs an attractive investment product.