Certificate of Deposit - CD

A CD (Certificate of Deposit) is a financial product offered by many commercial banks and credit unions. They are a time based deposit, generally for a fixed term of 1 month to 5 years. In exchange for allowing the bank to keep the deposit for a specified amount of time, the bank will offer a higher, fixed interest rate than what would be available with a standard savings account.

They have many things in common with savings accounts, including being insured by the FDIC for banks or the NCUA for credit unions. Interest for these accounts are generally credited monthly, but the the original money and any accrued interest cannot be withdrawn without a penalty. These penalties are generally substantial, to deter customers from withdrawing money prior to the maturity date.

Some banks offer CDs with "bump rate", where the customer can adjust the rate on the CD, normally once during the term of the CD. Also when the maturity date approaches, customers generally must choose what to do with money (Withdraw, roll over to a new CD), and some banks will automatically roll the CD over.

Once common technique that can be used with CDs is a ladder strategy. This can be a useful way to try to maximize return while still having money somewhat available. generally longer term CDs offer higher interest rates. By taking a portion of the money and investing it over time, the customer can lock in higher interest rates, while still having a portion of the investment available at regular intervals. For example with a 3 year strategy, you can open a CD with 1/3 of the money every year for 3 years. This would leave you with 3 CDs, each at a 3 year rate, but 1/3 of your money will reach maturity every year. This can be done with different terms, and shorter intervals to allow for maximum flexibility.