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Investors searching for relatively low-risk investments that can easily be converted into cash often turn to certificates of deposit (CDs) or share certificates. A CD/share certificate is a special type of deposit account with a credit union, bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, certificates are insured up to $250,000.

Here’s how CDs and share certificates work: When you purchase one, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing credit union or bank pays you interest, typically at regular intervals. When you cash in or redeem your certificate, you receive the money you originally invested plus any accrued interest. But if you redeem your certificate before it matures, you may have to pay an "early withdrawal" penalty or forfeit a portion of the interest you earned.

At one time, most certificates paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs and share certificates have become more complicated. Investors may now choose among variable rate, long-term, and certificates with other special features.

Some long-term, high-yield certificates have "call" features, meaning that the issuing credit union or bank may choose to terminate – or call – the certificate after only one year or some other fixed period of time. Only the issuing credit union or bank may call a certificate, not the investor. For example, a credit union or bank might decide to call its high-yield certificates if interest rates fall. But if you’ve invested in a long-term certificate and interest rates subsequently rise, you’ll be locked in at the lower rate.

Before you consider purchasing a CD or share certificate from your credit union or bank, make sure you fully understand all of its terms. Carefully read the disclosure statements, including any fine print. And don’t be dazzled by high yields. Ask questions – and demand answers – before you invest. These tips can help you assess what features make sense for you:

  • Find Out When the Certificate Matures – As simple as this sounds, many investors fail to confirm the maturity dates for their certificates and are later shocked to learn that they’ve tied up their money for five, ten, or even twenty years. Before you purchase a CD or share certificate, ask to see the maturity date in writing.

  • Investigate Any Call Features – Callable CDs or share certificates give the issuing credit union or bank the right to terminate - or "call"- after a set period of time. But they do not give you that same right. If interest rates fall, the issuing credit union or bank might call the certificate. In that case, you should receive the full amount of your original deposit plus any unpaid accrued interest.

  • Understand the Difference Between Call Features and Maturity – Don’t assume that a "federally insured one-year non-callable" certificate matures in one year. It doesn't. These words mean the credit union or bank cannot redeem the certificate during the first year, but they have nothing to do with the maturity date. A "one-year non-callable" certificate may still have a maturity date 15 or 20 years in the future. If you have any doubt, ask the representative at your credit union or bank to explain the certificate’s call features and to confirm when it matures.

  • Research Any Penalties for Early Withdrawal – Be sure to find out how much you'll have to pay if you cash in your CD or share certificate before maturity and whether you risk losing any portion of your principal.

  • Confirm the Interest Rate You’ll Receive and How You’ll Be Paid – You should receive a disclosure document that tells you the interest rate on your certificate and whether the rate is fixed or variable. Be sure to ask how often the credit union or bank pays interest – for example, monthly or semi-annually. And confirm how you’ll be paid – for example, by check or by an electronic transfer of funds.

  • Ask Whether the Interest Rate Ever Changes – If you’re considering investing in a variable-rate certificate, make sure you understand when and how the rate can change. Some variable-rate certificates feature a "multi-step" or "bonus rate" structure in which interest rates increase or decrease over time according to a pre-set schedule. Other variable-rate certificates pay interest rates that track the performance of a specified market index, such as the S&P 500 or the Dow Jones Industrial Average.

The bottom-line question you should always ask yourself is: Does this investment make sense for me? A high-yield, long-term certificate with a maturity date of 15 to 20 years may make sense for many younger investors who want to diversify their financial holdings. But it might not make sense for elderly investors.