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Chapter 5. Investments > Certificates of Deposit

Certificates of Deposit

Ask a teenager what a CD is and the answer will be a compact disc, which is how music is played today. But ask the parent or grandparent of that teenager the same question and most likely the answer you will get is Certificate of Deposit.

Certificates of Deposit are issued by banks and have penalties for early withdrawals of your money. At any one time, the longer you tie your money up in a CD, the higher the interest rate. A good strategy is to have a step approach to your CDs. Using this strategy you could, for example, purchase five CDs, one maturing after one year, one maturing after two years and so on. When each CD matures, you replace it with a new CD that matures in five years. In this way, you will have the liquidity of a CD maturing every year while overall you will be getting returns of close to the five-year rate.


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