Certificate of Deposit (CD)
What Is a Certificate of Deposit?
A certificate of deposit (CD) is a savings product offered by banks and credit unions that pays a fixed interest rate in exchange for keeping money deposited for a specific period of time.
CD terms can range from a few months to several years.
Why It Matters
Certificates of deposit provide a predictable and relatively low-risk way to earn interest on savings. Because funds are locked in for a set term, CDs typically offer higher interest rates than traditional savings accounts.
They are often used for short- to medium-term savings goals.
How Certificates of Deposit Work
When opening a CD, a customer deposits money for a fixed term.
Key features include:
- fixed interest rate
- fixed maturity date
- penalties for early withdrawal
- guaranteed interest earnings
At the end of the term, the CD matures and the depositor receives the original deposit plus interest earned.
Example
A customer depositing $5,000 into a one-year CD to earn a guaranteed interest rate is investing in a certificate of deposit.
CD vs Savings Account
- CDs lock funds for a fixed period.
- Savings accounts allow withdrawals at any time.
FAQs About Certificates of Deposit
What happens when a CD matures?
The funds become available, and the depositor can withdraw them or renew the CD.
Are CDs insured?
Yes, CDs are insured by FDIC or NCUA when held at insured institutions.
Can money be withdrawn early?
Early withdrawals usually result in a penalty.
Related Terms
