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What Are Certificate of Deposit (CD)? Thumbnail

What Are Certificate of Deposit (CD)?

Elements of FP Financial Friday

What Is a Certificate of Deposit (CD)?

A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time. Almost all consumer financial institutions offer CDs, although it’s up to each bank which terms it wants to offer, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties it applies for early withdrawal.

KEY TAKEAWAYS

  • Top-paying certificates of deposit pay higher interest rates than the best savings and money market accounts in exchange for leaving the funds on deposit for a fixed period of time.
  • Traiditional CDs are considered a safer and more conservative investment than stocks and bonds, offering lower opportunities for growth, but with a non-volatile, guaranteed rate of return.
  • Virtually every bank, credit union, and brokerage firm offers a menu of CD options.

Understanding Certificates of Deposit (CDs)


  1. The interest rate: Locked rates are a positive thing because they provide a clear and predictable return on your deposit over a specific time period. The bank cannot later change the rate and therefore reduce your earnings. On the flip side, a fixed return may hurt you if rates later rise substantially and you’ve lost your opportunity to take advantage of higher-paying CDs.
  2. The term: This is the length of time you agree to leave your funds deposited to avoid any penalty (e.g., six-month CD, one-year CD, 18-month CD, etc.) The term ends on the “maturity date,” when your CD has fully matured and you can withdraw your funds penalty-free.
  3. The principal: With the exception of some specialty CDs, this is the amount you agree to deposit when you open the CD.
  4. The institution: The bank or credit union where you open your CD will determine aspects of the agreement, such as early withdrawal penalties (EWPs) and whether your CD will be automatically reinvested if you don’t provide other instructions at the time of maturity.



A Financial Element, similar to a literary element, refers to components of a Financial Narrative. Understanding the financial elements can help us in creating and planning Your Financial Narrative. We will continue to look at various other financial elements each week as a part of the Financial Fridays