Expert: Paul Henneman - 7/10/2008

Question
I have $5,000 that I am willing to put into a cd, however I don't understand how they work, how does it pay off?  What should I do with my $5,000?

Answer
Jim,
  Thank you for your question! A CD is a "certificate of deposit". It represents a deposit that you make with a bank, where they will pay you a fixed amount of interest over a fixed period of time. The interest a CD typically earns is low, but it is also a very safe investment. This is no danger that your investment will lose value, as it could in the stock market. Instead, you earn a small but fixed amount on the CD.
   CD have various maturity dates, meaning the amount of time you must leave the funds in the CD before the CD "matures" and you can get your money back (Plus the interest amount). Shorter maturity time frames typically earn a slightly lower interest rate than longer terms.  The time you can purchase a CD for ranges from a few weeks to a few years.

Here are some additional links that I found online that may help further define a CD for you:
http://en.wikipedia.org/wiki/Certificate_of_deposit

http://www.investopedia.com/terms/c/certificateofdeposit.asp

http://beginnersinvest.about.com/cs/banking/a/062501a.htm

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
ValuEngine Inc
www.ValuEngine.com