Certificate of DepositCD
A certificate of deposit (CD) is a bank or credit union deposit that pays a fixed interest rate for a set term, such as 6 months or 5 years. You agree not to withdraw the money until maturity, and early withdrawals usually carry a penalty.
CDs are one of the simplest ways to earn a guaranteed return: lock money away for a set time and the bank pays a fixed rate. They suit savers who know they won't need the cash for a while. This entry explains how CDs work, how they compare with savings accounts and bonds, and how a CD ladder works.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- CD, Time deposit, Term deposit
- Updated
CDs in plain words
A CD lets customers earn a set level of interest on a deposit at a bank or credit union in return for leaving the money untouched for a fixed term.1
Like savings accounts, CDs are offered by banks and credit unions; withdrawing before maturity can trigger penalties.2
Many bank deposit accounts are insured up to $250,000 by the FDIC or NCUA.2
How a CD works, step by step
Choose a term
From a few months to several years.
Lock in a rate
Fixed for the term. See Interest Rate.
Deposit the money
Usually a minimum amount.
Earn interest
Paid periodically or at maturity. See Compound Interest.
Avoid early withdrawal
Penalties reduce earnings.
Renew or cash out
At maturity.
Worked examples
Example 1 — Interest earned
≈ $920$10,000 in a 2-year CD at 4.5%, compounded annually.
| After 2 years | $10,000 × 1.045² ≈ $10,920 |
| Interest | ≈ $920 |
Because the rate is fixed when you open the CD, you know exactly what the deposit will be worth at the end of the term.1
Example 2 — Early withdrawal
Half the interestSame CD, but you withdraw after 1 year; the penalty is 6 months' interest.
| Interest earned | $450 |
| Penalty | ≈ $225 |
| Net | ≈ $225 |
Taking the money out before the CD matures can trigger a penalty that wipes out a large part of the interest earned.2
Example 3 — A CD ladder
Yearly liquidity$20,000 split into four CDs of $5,000 maturing in 1, 2, 3 and 4 years.
| Access | One CD matures every year |
| Rates | Mix of short and long terms |
A ladder balances access to cash with higher longer-term rates. See Bond Ladder and Barbell.
CD vs savings account vs money market fund
| Aspect | CD | Savings / MMF |
|---|---|---|
| Rate | Fixed for the term | Variable |
| Access | Locked until maturity | Anytime |
| Insurance | FDIC/NCUA up to limits | Savings yes; MMF no |
| See also | Bond ladders | Money Market Fund |
When CDs make sense
Known future expenses
Saving for a date-certain goal.
Locking in rates
Before expected rate cuts. See Rate Hike and Rate Cut.
Low-risk savings
Insured, predictable returns.
Ladders
Staggered maturities for income.
Advantages and disadvantages
Advantages
- Fixed, predictable return.
- Insured up to limits.
- Usually higher rate than savings accounts.
Disadvantages
- Money is locked up.
- Early withdrawal penalties.
- Returns may lag inflation.
Going deeper
Read as far as you need. Each level builds on the one before it.
Banks' business model
Beginner
Virtually every bank or credit union offers CDs or similar products.1 Fixed-term deposits give banks stable funding they can lend out.
Brokered CDs
Intermediate
CDs bought through brokers can often be sold on a secondary market instead of paying a penalty, but their price moves with rates. See Interest Rate.
Real returns
Advanced
A 4% CD during 5% inflation loses purchasing power; compare with inflation-protected bonds. See Real Yield.
Common mistakes
Locking up emergency money
Keep some cash accessible.
Ignoring penalties
Read the terms first.
Exceeding insurance limits
Spread large sums across banks.
Forgetting auto-renewal
CDs may renew at lower rates.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A CD pays a fixed rate for a set term.
- Money is locked until maturity.
- Early withdrawals cost penalties.
- Bank CDs are insured up to limits.
- Ladders improve flexibility.
Frequently asked questions
Are CDs safe?
Can CD rates change?
What's a CD ladder?
Further learning
- Money Market Fund
A flexible cash alternative.
- Treasury Bills, Notes and Bonds
Government alternatives.
- Compound Interest
How interest grows.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Certificate of Deposit (opens in a new tab) Checked .
- FINRA. Taking a Look at Money Market Funds (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.