What Is a Certificate of Deposit (CD)?
A CD, or Certificate of Deposit, is a financial product issued by banks and credit unions that allows investors to earn a fixed interest rate on their money over a specific time. CDs are a low-risk investment choice with a fixed rate of return, making them an appealing alternative for people who wish to earn interest on their savings without putting their money in danger.
Definition 2
A certificate of deposit is an interest-bearing receipt for the deposit of funds in a bank or nonbank thrift institution for a specified period of time. A certificate of deposit is a negotiable instrument issued by a bank evidencing time deposit (CD).
More Thorough Understanding of the Term
Depending on the banking institution, a minimum deposit is usually required to open a CD, ranging from a few hundred to several thousand dollars. The term of the CD, or the amount of time the money must be kept in the account, might also differ.
Term lengths typically range from a few months to several years, with longer terms yielding higher interest rates. Once the CD is opened, the investor cannot withdraw the funds without incurring a penalty fee until the period's conclusion. The investor can opt to withdraw the cash at the end of the term or roll the balance over into a new CD.
CDs are low-risk investments. CDs are considered a safe investment because the rate of return is fixed, and the funds are insured. This makes them appealing to people who want to earn a return on their assets without taking on significant risks.
Individuals who desire to save for a specific purpose, such as a down payment on a house or a child's education, can benefit from CDs. Because the funds are fixed for a set time, investors can plan their savings strategy and know exactly how much interest they will earn.
How to Choose a CD?
There are various aspects to consider when selecting a CD. One of the most crucial is the interest rate, which determines how much interest the investor earns throughout the CD. To discover the best rate, compare rates from several banks and credit unions.
Another thing to consider is the CD's term. Longer durations typically give more excellent interest rates, but investors should examine their financial goals and ability to lock in their assets for longer.
Examples of CD
Example 1
A traditional CD is a fixed-rate CD with a guaranteed rate of return over a set time. For example, an investor could select a 1-year CD with a set interest rate of 2%. The investor would receive their principal plus interest at the end of the year.
Example 2
A step-up CD has an interest rate that gradually increases throughout the CD. A 3-year step-up CD, for example, might pay 1% in the first year, 1.5% in the second year, and 2% in the third year.
In Sentences
- Individuals who want to earn income on their assets without taking on significant risks can benefit from CDs.
- It is a short-term financial instrument offered by a bank or credit union.