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 in exchange for the depositor agreeing not to withdraw the funds until the maturity date. CDs typically offer higher interest rates than regular savings accounts because the bank can use the deposited funds for a guaranteed period. Early withdrawal usually incurs a penalty. CDs are FDIC insured and considered one of the safest investment options.
Certificate of Deposit (CD)
Definition
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 in exchange for the depositor agreeing not to withdraw the funds until the maturity date. CDs typically offer higher interest rates than regular savings accounts because the bank can use the deposited funds for a guaranteed period. Early withdrawal usually incurs a penalty. CDs are FDIC insured and considered one of the safest investment options.
Example
You deposit $10,000 in a 12-month CD at 5.25% APY. At maturity, you receive $10,525. If you withdraw early after 6 months, you might face a 3-month interest penalty ($131.25), receiving only $10,131.25 instead of the full $10,525.
Key Points
- 1Higher rates than savings accounts in exchange for locking up funds
- 2Terms range from 3 months to 5+ years
- 3Early withdrawal penalties typically equal 3-12 months of interest
- 4CD laddering strategy spreads deposits across multiple maturity dates