Certificate of deposits (CD) are short to medium-term debt instruments, which are often granted by commercial banks and other financial bodies to investors. These deposits can also be issued by the bank in any denomination. This is done by the investors issuing lending money to the institution for a given period of time and the investors cannot withdraw the amount. In exchange therefore, the banks will pay an agreed rate of interest to the investors called certificate of deposit rate; CD rate. If the investor goes for a CD that has a long term maturity, the amount of interest paid will be higher. This is because; the investor will be denied access to his money till maturity date, thereby foregoing the use of his capital.

One of the factors that made CDs very attractive is because there is low market risk. In places like the united state of America, this is protected and insured by one of the highest insurance companies, called the federal deposit insurance corporation (FDIC) when it is issued by a bank. This implies that the CD rate will not be affected by variations in the stock market. When you compare CD rate with other investments avenues like money market mutual funds, you will see that the rates of return on CDs are convincingly very higher.

On the other hand, certificates of deposit have a fixed rate of interest, a determined period of maturity and also can be granted in any denomination. Early withdrawal of amount before the maturity period will attract a penalty to the investor or the depositor. This penalty may be in the form of lose of interest for a given period of months. The depositor however can surmount this disadvantage by employing the system called ‘CD laddering’

The amount of interest that an investor will get on a certificate of deposit (CD) can be determined using the CD calculator, which will require the investor to supply some information regarding the amount of deposit, required rate of return and others. The two most important factors that determine CD rates are the length of the maturity period and the current interest rate environment, which involves the rates offered by different competitors. The history of CD rates shows that the rates were between 2-16% worldwide during the last 30 years.

Nevertheless, the institutions that offer this financial instrument consider several other factors when setting their CD rates. These include; the length of the deposit. They offer different rates depending on the duration of the CD. The longer the duration, the more yields it will make. It therefore encourages depositors to leave money for longer periods.

 The Second factor is the amount of deposit. This is because most issuers prefer large amounts that exceed the stated benchmark. They will pay greater interest on such a CD than one with a lower deposit.

The institutions can also raise their own interest as a result of comparative strategy and profitability for the credit union. There are also a couple of factors that determine CD rates, but this are often set at the whims and caprices of the issuing financial body.