What is a Certificate of Deposit (CD)?

• Top-paying certificates of deposit pay higher interest rates, in exchange for leaving the funds on deposit for a fixed period of time.
• CDs are a safer and more conservative investment than stocks and bonds, offering lower opportunity 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.
• The top nationally available CD rates are typically three to five times higher than the industry average for every term
• Although you lock into a term of duration when you open a CD, there are options for exiting early should you encounter an emergency or change of plans.

A CD opening is similar to opening any standard bank deposit account. The difference is what you’re agreeing to when you sign. After you’ve shopped around and identified which CD(s) you’ll open, completing the process will lock you into a four things

Interest rate 

Locked rates provide a clear and predictable return on your deposit over a specific time period. Banks cannot later change the rate, and this reduce your earnings. On the other side, if rates later rise substantially a fixed return may lose your opportunity to take an advantage of higher-paying CDs.

Term

Length of time you agree to leave your funds deposited – to avoid any penalty (e.g., 6-month CD, 1-year CD, 18-month CD, etc.). It ends on the “maturity date,” when your CD has fully matured and you can withdraw your funds penalty-free.

The principal

This is the amount you agree to deposit when you open the CD.

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. Once your CD is established and funded, the bank or credit union will administer it like most other deposit accounts, with either monthly or quarterly statement periods, paper or electronic statements, and usually monthly or quarterly interest payments deposited to your CD balance, where the interest will compound.