What Does a Certificate of Deposit Mean?

CD (Certificate of Deposit) — All You Need to Know

  A certificate of deposit (CD) is a type of time deposit given by banks and finance unions that pays a higher interest rate in return for the consumer consenting to keep a lump-sum deposit unattended for a set amount of time. Today we will discuss all you need to know about certificate of deposit (CD).


What Does a Certificate of Deposit Mean?

  A CD is a fixed-rate savings account with a set period. They may charge higher than traditional deposit accounts. Credit unions and commercial banks provide these time bank deposits, which pay a return on the amount you put in. CDs have various characteristics that distinguish them from savings and money market products.

Certificate of Deposit Definition

  A Certificate of Deposit, or CD, is a form of savings account with a predetermined and fixed interest rate that is often greater than a conventional savings account, a set term length, and a set time to maturity. A CD is a deposit that you make for a predetermined amount of time, usually three to five years. Monthly charges are uncommon in CDs, almost all carry a premature withdrawal penalty.

  CDs, like savings accounts, are guaranteed as “money in the bank” (with an upper threshold of $250,000 in the United States) and so up to the insured deposit cap in the area. They are technically risk-free. The Federal Deposit Insurance Corporation (FDIC) insures bank CDs, whereas the National Credit Union Administration (NCUA) insures credit union CDs in the United States.

How Does CD Work?

  Annual percentage yield, or APY, is the unit of measurement for CD rates. After compounding, this is the actual annual interest rate. Compounding occurs when your fund makes money from both the initial deposit and the growing interest. After your CD is set up and financed, the bank or credit union will treat it like any other bank deposit, with statement periods ranging from every month to every quarter on paper or electronic statements, and interest payments posted to your CD balance. Here, the interest compounds itself. The interest you earn on a CD is normally compounded and deposited to your account every month or every day, and you get it all at the end of the CD period. If your bank permits it, you can also choose to get periodic interest payments.

How Is CD Categorized?

  CDs usually have a set period and a set rate of interest. However, based on where you do your banking-related activities, you may be able to choose from a few additional options. The most typical CD option involves putting your funds, leaving them undisturbed until the maturity date, and then retrieving them at maturity.

  No-penalty CD: Also known as a “liquid CD,” this CD allows you to withdraw money prematurely without incurring a charge in exchange for low rates compared to other CDs. These sound appealing since they appear to offer the same interest rate as a certificate of deposit but with less risk. The sole disadvantage is the lower interest rates compared to other options. Aside from that, no-penalty CDs are an excellent choice.

  High-yield CD: A CD with above-average CD rates is known as a high-yield CD. As banks and credit unions may vary their interest rates whenever the Federal Reserve adjusts its rate, what qualifies as the maximum rate changes with time. When you open a high-yield CD, you commit to that specific rate for a set period of time, usually 3 to 5 years. These CDs are federally insured, just like ordinary CDs, for up to $250,000 per account owner. Online banks and credit unions, that have the ability to offer increased rates than traditional banks, are the most common places to get high-yield CDs. This is partly due to the fact that they do not cover the costs of maintaining branches or designated ATMs.

  Jumbo CD: This is similar to a conventional CD, however it has a higher minimum balance requirement to open and operate. As barter for traditionally higher rates, the required minimum balance has been $100,000 in the past. When looking for CDs, you may come across Jumbo CDs. They are simply CDs with a big deposit requirement. Since no regulatory body specifies what constitutes a “large” CD, each bank must determine for themselves. A $50,000 minimum investment is the most common requirement. Some financial institutions refer to CDs for $25,000 as jumbo certificates, while others save the jumbo designation for CDs worth more than $100,000.

  Bump-up or step-up CD: These CDs have a greater interest rate at the end of the term. Bump-up CDs need you to request a rate hike if one is available, whereas step-up CDs have a set rate rise frequency. Both offer lower interest rates compared to fixed-rate CDs, and some have higher minimum deposit requirements. You can usually only seek one rate hike.

  Certificates of deposit can also be a good way to put money down for pension plans. IRA CDs are offered from banks and credit unions in the form of a distinct menu of IRA CDs or conventional CDs that can be set up as IRA CDs.

  Brokered CD: A brokered CD is one that is sold by a third-party provider, like a brokerage firm.

Certificate of Deposit Example

  Commercial banks such as Bank of America and Discover Bank, among others, may issue certificates of deposit in the real world. One of Bank of America's products, for instance, requires a $10,000 minimum deposit and offers maturities ranging from 7 to 35 months. Let's look at another scenario: Rogan put $5,000 into a CD with an institution at a fixed interest rate of 5%. The maturity period was five years. Because the capital is $5,000 and the maturity returns are $6,382, the total investment is $5,000. For a period of five years, the CD yields $1,382.

Certificate of Deposit Advantages and Disadvantages


  •   Offers higher interest rates than a money market or savings account

  •   Avoids the instability and losses associated with equities and bonds by paying a fixed, consistent rate of interest.

  •   If you open an account with an FDIC bank or an NCUA credit union, it's federally insured.

  •   Since the early withdrawal of cash results in a fine, it can aid in fending against spending impulses.


  •   Cannot be redeemed before maturity unless you incur a fine for premature withdrawal

  •   With time, it often earns less than equities and bonds

  •   Irrespective of whether interest rates go up during the term, this investment earns a fixed rate of interest

Why Open a Certificate of Deposit?

  Even while CDs have lower investment returns than the share market, they may be worthwhile for individuals who want a low-risk investment that keeps their money safe from temptation.

  When you research the top CD rates, you can be certain that you're obtaining the best rate for your available initial balance and the term that perfectly matches your requirements.

  CDs are normally covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to the restrictions governing every account, making them a fairly low-risk investment. Minimal yields are also dictated by CDs' low risk relative to the possible instability of the debt and equity markets.

How is Certificate of Deposit Calculated?

  The annual percentage yield, or APY, is the metric by which CD rates are measured. This is the true annual interest rate after compounding. When your fund earns money from both the upfront payment and the increased interest, this is known as compounding. The bank or credit union will regard your CD like every other bank deposit once it has been set up and funded. The income you earn on a CD is usually compounded monthly or daily and put into your account.

Is CD Investment Good?

  CDs can be a good investment option if you are looking for a low-risk instrument. However, stocks and bonds can often be more printable than CDs.

What is a CD Ladder and How to Build It?

  Smart CD investors use a specialized strategy to hedge against rate changes and maximize their returns. It's known as a CD ladder, and it allows you to take advantage of the higher rates available with 5-year CD maturities. The difference is that instead of every five years, a part of your funds becomes accessible every year. Some CD investors use a shorter version of the CD ladder, with 6-month CDs at the bottom and 2 or 3-year CDs at the top of the ladder. Instead of being available only once a year, money would be available twice a year. Rather than 5-year rates, you'd be receiving the best rates available for 2- or 3-year CDs.

Certificate of Deposit vs. Mutual Fund (MF) Comparison

  When it comes to security, CDs are clear winners against mutual fund comparisons. But when looking at the returns, MFs are generally better in the long run. MFs are also much more flexible since CDs are technically not flexible at all. In the end, the choice lies with your risk-taking capacity.


  We hope this guide will help you understand the ins and outs of CDs better.


  Which banks have the best CD rates?

  PenFed Credit Union, First National Bank of America, KS State Bank, and Marcus by Goldman Sachs are some of the banks with the best CD rates in the US.

  When will CD rates go up?

  New loans will face higher interest rates when the prime rate rises. ‌Similarly, the interest rate on savings instruments like CDs can increase as well.

  How much interest will I earn on a CD?

  Youll typically earn a higher interest rate than what your savings account offers.

  What is a CD savings account?

  Its an account that allows customers to save money generally at a fixed rate of interest for a predetermined duration.

  How to withdraw money from a CD account?

  You can withdraw money from a CD account only after term maturity. Premature withdrawals invite hefty penalties.

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