Certificate of Deposit (CD)

A CD works much like other time deposits: you deposit a sum of money for a set period and earn a guaranteed rate of interest. The term is especially common in the United States.

CDs usually pay higher interest than regular savings accounts, with longer terms often paying higher rates. In exchange, the money is locked up until the CD matures. Withdrawing early typically means paying a penalty, often a few months' worth of interest.

For example, a five-year CD of 5,000 paying 4% a year, compounded annually, would be worth about 6,083 at maturity.

Some investors use a strategy called laddering, splitting money across CDs that mature at different times, such as one, two, three, four and five years. As each CD matures, the money can be spent or reinvested, providing regular access to funds while still earning higher long-term rates.

CDs from insured banks are covered by deposit insurance up to the applicable limit. Some brokered CDs can be sold before maturity in a secondary market, but their price may be lower than the amount invested if interest rates have risen.