Certificate of Deposit (CD)

(This article is specific to the United States.)


A certificate of deposit or CD is a kind of a time deposit offered to consumers by banks, thrift institutions, and credit unions.

CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.

In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid-2004, with interest rates expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock market, the bond market, or other indices are introduced.

A few general guidelines for interest rates are:
1. A larger principal should receive a higher interest rate, but may not.
2. A longer term will usually receive a higher interest rate, except in the case of an inverted yield curve (i.e. preceding a recession)
3. Smaller institutions tend to offer higher interest rates than larger ones.
4. Personal CD accounts generally receive higher interest rates than business CD accounts.
5. Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.

Example of a CD: Let's say that you purchase a $100,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end, the CD will have grown to $105,000 ($100,000 * 1.05).


CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.