Certificates of Deposit
A certificate of deposit (CD) is an interest-paying savings vehicle. A CD has a stated maturity date, a specified interest rate and can be issued in any denomination by commercial banks, thrifts and credit unions.
How It Works
Share this article
A certificate of deposit is a promissory note issued by a bank, thrift institution or credit union. It is a time deposit, meaning the institution keeps your money for the stated time and you are restricted (in the form of a penalty) from accessing the money prior to the maturity date.
This type of investment is less liquid than a cash deposit such as a checking or money market account. Because of this, interest rates are usually higher compared to cash deposit rates. If you must access the money before maturity, you will pay a penalty (typically a loss of interest payment over a certain period), which will eat into your total return.
A typical CD can be purchased for any amount and has a number of time period options. The most popular are between three months and five years. Usually, a longer holding period means a higher interest rate. CDs are insured by the FDIC up to $250,000.
To read more, please become an AAII member or CLICK HERE.