What is a Certificate of Deposit? (2024)

FAQs

What is a Certificate of Deposit? ›

A certificate of deposit is a type of savings account that pays a fixed rate on a lump-sum deposit that is held in an account for a fixed period of time. They differ from traditional savings accounts because the money must remain untouched for the agreed-upon period of time to avoid early withdrawal penalties.

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest.

Certificate of Deposit (CD) A certifiicate issued by a bank to a person deoposititng money for a specified length of time. Higher Rate then Regular Savings.

A certificate of deposit (CD) is defined as an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn premium rates. It is like a savings account. For example, Joe invested $5,000 in CD with a bank at a fixed interest rate of 5% with 5 years maturity.

Certificates of deposit (CDs) are bank deposit products that hold your funds for a set period of time, or term. In exchange, the bank pays you a fixed annual percentage yield (APY), making CDs a safe, reliable way to grow your money.

They're federally insured for up to $250,000 and offer a safe place to put your money while earning interest. CDs are best for individuals looking for a guaranteed rate of return that's typically higher than a savings account.

A certificate of deposit (CD) is an example of a low-risk, low-return place to stash your money. CDs are offered by banks and credit unions. Like bonds, they have maturity dates.

Understanding How a Certificate of Deposit Works

The term is the length of time you agree to leave your money deposited. The specific terms vary depending on where you open an account, but common CD terms can range from 3 or 6 months to 1 year, 18 months, or even up to 5 years.

CD certificate credit memorandum credit slip deposit slip term CD.

CDs are typically regarded as secure investments, although you can indeed lose money under certain circ*mstances. If, for example, you decide to withdraw from a CD prior to its maturity date, you'll likely be hit with an early withdrawal penalty. This could equate to several months' worth of interest.

Are CDs worth it? ›

CDs are a safe investment that can net you a higher return than most savings and money market accounts. Since rates have increased over the past year, they're more appealing to some savers. But with some banks already dropping rates, it's best to lock in a rate soon.

You cannot add money to most CDs. Typically, CDs only allow you deposit money when you open the account. Then you must leave your account balance untouched until your CD reaches maturity. One specialty CD is an exception to this rule — an add-on CD.

Unlike savings or money market accounts, you can deposit a set amount of money into your CD account and commit to leaving your money there for a fixed period of time, which may range from three months to five years or even longer. In return, you'll earn a fixed amount of interest based on a predetermined interest rate.

Example of a Fixed-Rate CD

A bank offers a fixed-rate CD that guarantees interest rate returns of 5%. The CD's term period is six months. Tatiana invests $1,000 in the CD. After six months, she has earned about $25 (the exact amount depends on how often the interest is compounded).

The cons of CDs

With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.

A CD allows you to hold money for a specific amount of time while earning interest. A CD can be used as a savings vehicle, but it isn't the same as a savings account or money market account. For instance, with those accounts, you can generally make up to six withdrawals per month if needed.

However, our opinions are our own. See how we rate banking products to write unbiased product reviews. Depending on the bank, a $5,000 CD deposit will make around $25 to $275 in interest after one year.

A CD allows you to hold money for a specific amount of time while earning interest. A CD can be used as a savings vehicle, but it isn't the same as a savings account or money market account. For instance, with those accounts, you can generally make up to six withdrawals per month if needed.