Certificate of Deposit (CD)
A time deposit that pays a fixed interest rate in exchange for leaving funds untouched for a set term.
What is Certificate of Deposit?
A certificate of deposit (CD) is a time-deposit savings product offered by banks and credit unions. The depositor agrees to leave a fixed amount of money untouched for a specified term — ranging from one month to five or more years — in exchange for a guaranteed, fixed interest rate typically higher than regular savings accounts. Early withdrawal incurs a penalty, usually forfeiting several months of interest. CDs are FDIC-insured up to $250,000 and are useful for funds with a known future need date. CD laddering — splitting funds across multiple maturities — balances higher yields with periodic liquidity.
Example
An investor places $20,000 in a 1-year CD at 5.00% APY. After 12 months, they receive $21,000. If they had withdrawn early at month 6 with a 6-month penalty, they would earn 0 interest and lose a portion of principal in some cases.
Source: FDIC — Certificate of Deposit