Certificate of deposit (CD)

Definition

A Certificate of Deposit (CD) is a financial product offered by banks that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period. CDs are considered low-risk investments with fixed terms ranging from a few months to several years.

5 Must Know Facts For Your Next Test

1. The interest rate on a CD is typically higher than that of a regular savings account.
2. CDs have fixed maturity dates, and withdrawing funds before maturity can result in penalties.
3. The principal amount of the CD is insured by the FDIC up to $250,000 per depositor, per bank.
4. Interest rates on CDs can be impacted by broader economic conditions and monetary policy.
5. CDs can be used as benchmarks for calculating other financial statistics like yield spreads.

Review Questions

• What happens if you withdraw funds from a CD before its maturity date?
• How does the interest rate on a CD compare with that of a regular savings account?
• What is the maximum amount insured by the FDIC for CDs?

Related terms

Savings Account: A bank account that earns interest on deposited funds but allows for more flexibility in withdrawals compared to a CD.

FDIC Insurance: Federal Deposit Insurance Corporation protection covering up to $250,000 per depositor, per bank in case of bank failure.

Yield Spread: The difference between yields on different debt instruments, often used to assess risk or return characteristics.