Certificate of deposit (CD) definition
/What is a Certificate of Deposit?
A certificate of deposit is a term bank deposit with a fixed duration and stated interest rate . A CD is essentially a promissory note issued by a bank. A certificate of deposit normally pays a fixed interest rate upon maturity, though some variable-rate versions are available. A more restrictive CD may require an early-withdrawal penalty.
There is a perception that CDs are more secure than commercial paper, since CDs are issued by banks, which are more closely regulated than companies. There is a capped amount of Federal Deposit Insurance Corporation (FDIC) insurance coverage of this investment.
Advantages of a Certificate of Deposit
There are several advantages associated with an investment in a certificate of deposit, which are as follows:
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Safe investment . CDs are considered one of the safest investment options because they are typically insured by government agencies, such as the FDIC (Federal Deposit Insurance Corporation) in the U.S. (up to $250,000 per depositor, per insured bank). This means your principal investment is protected, even if the bank fails.
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Predictable returns . CDs offer a fixed interest rate, providing guaranteed returns over the term of the deposit. This predictability helps with financial planning, as you know exactly how much you’ll earn.
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Higher interest rates than savings accounts . CDs generally offer higher interest rates compared to traditional savings accounts or money market accounts. The longer the term of the CD, the higher the interest rate tends to be.
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Low risk . CDs are a low-risk investment option, making them suitable for conservative investors or those who want to preserve capital while earning some interest.
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Flexible term options . Banks offer CDs with a variety of terms, ranging from a few months to several years, allowing you to choose one that aligns with your financial goals.
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No market volatility . Unlike stocks or bonds, the value of a CD does not fluctuate with the market. This makes CDs a good choice for those who want to avoid market risks.
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Encourages savings discipline . With a CD, your money is locked in for a specific period of time. This discourages impulsive withdrawals and helps maintain a disciplined savings habit.
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No fees . Most CDs do not have account maintenance fees, unlike some savings accounts or investment accounts.
