what is a certificate of deposit

A certificate of deposit (CD) is a type of savings account offered by banks, thrift institutions, and credit unions. When a depositor purchases a CD, they agree to leave a certain amount of money on deposit at the bank for a certain period of time, such as one year. In exchange, the bank agrees to pay them a predetermined interest rate and guarantees the repayment of their principal at the end of the term. CDs differ from savings accounts in that the CD has a specific, fixed term before money can be withdrawn without penalty. Withdrawing money early means paying a penalty fee to the bank. CDs usually have higher interest rates than savings accounts as an incentive for lost liquidity. CDs offered by banks are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), and those offered by credit unions are insured up to $250,000 by the National Credit Union Administration (NCUA) . When shopping for a CD, it is important to compare different offers by looking at the term, the interest rate, and the amount of the penalty for withdrawing money before the end of the term.