How do CDs work?
Interest rates can change frequently, but Fixed-income investments can offer beneficial ways to generate income as part of a diversified portfolio.
A certificate of deposit (CD) is a fixed-income investment and is typically considered among the lowest-risk investment options. CDs let you invest your money for a set period — ranging from months to years — to earn a fixed rate. For some, a CD presents the ideal combination of reliable returns and low risk.
A brokered CD is a fixed-income investment purchased through a brokerage firm rather than directly from a bank. Unlike traditional bank CDs, brokered CDs are issued by multiple banks and offered through a broker, allowing investors to diversify across institutions while staying within FDIC insurance limits. FDIC insurance (Federal Deposit Insurance Corporation insurance) protects depositors by guaranteeing up to $250,000 per depositor, per insured bank, for each account ownership category in the event the bank fails.
Brokered CDs are held in safekeeping by the brokerage and can be traded on the secondary market before maturity, which means their value may fluctuate based on interest rate movements. At maturity, the investor receives the full principal plus accrued interest. Brokered CDs are commonly used in portfolio strategies for liquidity, income planning, and risk management, especially for clients seeking convenience, diversification, and market flexibility.
Edward Jones is not a bank or FDIC-insured institution, and deposit insurance only covers the failure of an insured bank. FDIC insurance for brokered CDs offered by Edward Jones is provided by the FDIC-insured banks that issue the CDs on a pass-through basis, which requires certain conditions to be met for coverage to apply.
The list of those banks frequently changes. For a list of FDIC-insured banks in our network offering brokered CDs, see our List of Banks for Brokered FDIC-Insured Certificates of Deposit (CDs).
What are CDs?
When you invest in a CD, you essentially lend a specific amount of money to the financial institution for a set period, known as the term. In return, the financial institution pays you a fixed interest rate over the term.
CDs typically have higher interest rates compared to regular savings accounts, though an early withdrawal from a CD can result in penalties. The duration of a CD term can range from a few months to several years, with longer terms generally offering higher interest rates.
When your CD matures, you get back your principal investment along with interest. You can choose to reinvest your CD upon maturity or withdraw the principal along with the accured interest.
If you don't withdraw your money after maturity, it may get automatically reinvested into a new CD. Many investors choose to use a CD investment strategy instead of buying a single CD.
Are CDs a good investment?
CDs tend to be a good investment when interest rates are high and are expected to drop over the short or long term. But whether a CD is a good investment depends on your investing goals.
Investing in CDs
Many investors follow a CD ladder strategy when investing in CDs. A CD ladder involves investing in multiple CDs with varying maturity dates. For example, you might purchase five different CDs with varying maturity dates. When the first CD matures in one year, for example, you purchase a new five-year CD. In two years, when the second CD matures, you also roll it over into a five-year CD.
With this strategy, 20% of your CD investment will mature each year. As a result, you will have access to the full value of that investment, which you can reinvest at the prevailing interest rates.
Depending on your risk tolerance, bonds may also be part of your diversified portfolio. CDs can minimize credit default risk, while bonds provide flexibility and potentially more upside. Discuss with your advisor the best strategy for your situation.
This pie chart details by percentages the types of bonds and certificates of deposit (CDs) to consider in building in your bond and CD ladder. It recommends the largest percentage — 40% to 50% — should be bonds and CDs with an intermediate-term maturity of six to 15 years. The second-largest amount — 30% to 40% — should be in bonds and CDs with a short-term maturity of up to five years. The smallest amount — 15% to 25% — should be in bonds and CDs with a long-term maturity of 16 years or more.
This pie chart details by percentages the types of bonds and certificates of deposit (CDs) to consider in building in your bond and CD ladder. It recommends the largest percentage — 40% to 50% — should be bonds and CDs with an intermediate-term maturity of six to 15 years. The second-largest amount — 30% to 40% — should be in bonds and CDs with a short-term maturity of up to five years. The smallest amount — 15% to 25% — should be in bonds and CDs with a long-term maturity of 16 years or more.
CD factors to consider
1. Maturity
It can be tempting to invest in short-term CDs while you wait for rates to rise. However, short-term rates are generally lower than intermediate- and long-term rates, so holding too much in short-term CDs can reduce your income. Also, there is no guarantee rates will be higher when the CD matures.
As mentioned above, we recommend owning bonds and CDs with a variety of maturities, which can help smooth out wide swings in your income and doesn’t depend on rates rising or falling.
2. Call features
Some brokered CDs offered by Edward Jones may be callable. Callable brokered CDs are a type of FDIC-insured CD that exhibits a call feature, similar to other types of callable fixed-income securities. A call feature means the issuing bank has the right, but not the obligation, to redeem the CD before its maturity date. This typically happens at a predetermined time and price, often when interest rates change, and may allow the bank to set rates at lower cost. Callable CDs can be redeemed prior to maturity by the issuing bank at a stated time frame and set call price.
Most often, a callable brokered CD is called when interest rates are falling. This allows the issuer to stop paying CD holders more than the prevailing rates. The holder could then face a loss of the interest earned or be forced to reinvest at a lower rate.
Callable brokered CDs are issued at higher rates than other brokered CDs to compensate for the extra risk premium. Because of this additional risk, be sure to discuss with your financial advisor whether callable brokered CDs are suitable for your situation.
3. Annualized rates
This is called the annual percentage yield (APY) and is based on each full year you hold the CD.
FAQs: Investing in CDs
Can I make money from a CD before it matures?
While some CDs incur penalties if funds are withdrawn early, others may allow you to withdraw money without fees. Your financial advisor can review the terms and conditions of a CD with you before you invest. This way, you can evaluate whether any penalties would be incurred from an early withdrawal.
How much can a $10,000 CD make in a year?
How much a CD can make in a year depends on the annual percentage yield of the CD. For example, if you were to buy $10,000 of a one-year CD with an APY of 2%, you would receive approximately $200 in interest. However, if you invest the same amount in a six-month CD with an APY of 2%, you would receive approximately $100 in interest, or half the amount for holding the CD for half a year. (Illustration assumes CD is held to maturity.)
Should I buy CDs from Edward Jones?
Contact an Edward Jones financial advisor to discuss your goals and how CDs may fit into your strategy.
Important information:
You must evaluate whether CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.
CD values are subject to interest rate risk such that when interest rates rise, the prices of CDs can decrease. If CDs are sold prior to maturity, investors can lose principal value.
Please see the Certificate of Deposit Disclosure Statement (PDF) for additional information.