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Account & Regulation

Certificate of Deposit

A time deposit at a bank or credit union that pays a fixed interest rate for a set term. FDIC-insured up to the standard limit and lower risk than most investments, but with early withdrawal penalties.

What is a certificate of deposit?

A certificate of deposit (CD) is a savings product offered by banks and credit unions. You lock up a specific amount of money for a fixed term (a few months to several years) in exchange for a fixed interest rate that is usually higher than a standard savings account. At the end of the term (maturity), you get your principal back plus the accrued interest.

Key features

  • Fixed rate: the APY is set when you open the CD and does not change, even if market rates move
  • Fixed term: common terms are 3, 6, 9, 12, 18, 24, 36, and 60 months
  • FDIC / NCUA insured: up to the standard federal insurance limit per depositor per institution
  • Early withdrawal penalty: pulling money out before maturity typically costs several months of interest
  • No market risk: as long as you hold to maturity, you get back exactly what the contract promised

Types

  • Traditional CD: single deposit, fixed rate, fixed term
  • No-penalty CD: allows one early withdrawal without penalty; usually lower rate
  • Bump-up CD: lets you raise the rate once during the term if rates rise
  • Brokered CD: sold through a brokerage rather than directly from a bank. Can be sold on a secondary market before maturity (at prevailing market price), but may lose value if rates rise
  • Callable CD: the issuing bank can redeem the CD early, usually if rates fall. Higher rate as compensation for the call risk

CDs vs. alternatives

  • vs. Treasury bills: T-bills offer similar low risk, often higher yields, and interest exempt from state tax. Slightly less convenient but usually the better choice for rates above 6 months
  • vs. Money market funds: MMFs are liquid daily; CDs lock up the money but often pay a bit more
  • vs. high-yield savings accounts: HYSAs pay variable rates; CDs lock in a known rate
CDs are a tool for money you know you won't need for a specific period, where certainty of rate matters more than liquidity.

Related Terms

Bond

A debt instrument where you lend money to a government or company in exchange for regular interest payments and the return of your principal at maturity.

Index Fund

A mutual fund or ETF designed to track a specific market index, such as the S&P 500. Low fees, broad diversification, and historically better long-term returns than most actively managed funds.

Money Market Fund

A type of mutual fund that invests in short-term, low-risk debt like Treasury bills and commercial paper. Used as a cash-equivalent place to park money with a higher yield than a typical bank account.

REIT

A Real Estate Investment Trust: a company that owns income-producing real estate and trades like a stock. Required to pay out at least 90% of taxable income as dividends, which makes REITs popular for income investors.