Certificate of Deposit (CD)
Quick Definition
A time deposit offered by banks that pays a fixed interest rate in exchange for keeping funds deposited for a specific term.
Key Takeaways
- Pays a fixed interest rate for a specific term — higher than regular savings
- Early withdrawal typically incurs a penalty of several months' interest
- FDIC-insured up to $250,000 per depositor, per institution
- Variations include no-penalty, jumbo, brokered, and bump-up CDs
- CD laddering balances higher rates with regular access to funds
What Is Certificate of Deposit (CD)?
A certificate of deposit (CD) is a savings product offered by banks and credit unions that pays a fixed interest rate for a specified term, ranging from a few months to several years. CDs typically offer higher interest rates than regular savings accounts in exchange for the depositor agreeing to leave their money untouched until the maturity date. Early withdrawal usually incurs a penalty, often equal to several months of interest. CDs are FDIC-insured up to $250,000 per depositor, per institution, making them one of the safest investment options. Variations include no-penalty CDs (allowing early withdrawal without penalty at lower rates), jumbo CDs (requiring larger minimum deposits, typically $100,000+), brokered CDs (sold through brokerage firms and tradable on secondary markets), and bump-up CDs (allowing a one-time rate increase if rates rise during the term).
Certificate of Deposit (CD) Example
- 1An investor locked $50,000 in a 12-month CD at 5.0% APY, earning $2,500 in guaranteed interest while keeping the principal FDIC-insured.
- 2Using a CD ladder strategy, a retiree split $100,000 across five CDs with maturities of 1, 2, 3, 4, and 5 years to balance higher rates with periodic liquidity.
Related Terms
Laddered CD Strategy
An investment approach that staggers certificate of deposit maturity dates to balance yield and liquidity.
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
Compound Interest Savings
A savings strategy that maximizes the compounding effect by consistently contributing and reinvesting earned interest.
Savings Rate
The percentage of income directed toward savings and investments rather than consumption.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
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