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Investing in a certificate of deposit

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Definition

A certificate of deposit is a bank account set up with specific terms. These terms have time lengths for earning interest at a consistent rate.

Maturity Date

The money in a certificate of deposit is characteristically locked away from the investor until a specific date. This date is known as the maturity date. This is the day when the money earned on the certificate of deposit is paid to the investor and the “lock” is released.

Terms

A certificate of deposit can have a maturity date for as short as three months or up to five years. As the investor agrees not to withdraw money from the certificate of deposit, a fixed rate to earn interest on the money is applied.

Penalties

Money-losing penalties are the consequences of withdrawing money from a certificate of deposit before its maturity date. Banks look forward to using the money given to them in the certificate of deposit. Therefore, these penalties are enforced to persuade the investor not to withdraw the money before the maturity date.

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