What is a Bank CD?
A certificate of deposit (CD), commonly known as a bank CD, is a financial product offered by banks and credit unions. It is a type of time deposit where you deposit a certain amount of money with the bank for a fixed period, known as the CD's term or maturity. In return, the bank pays you interest on the deposit.
Here's how a bank CD typically works:
Deposit: You deposit a specific sum of money, often referred to as the principal, into a CD account. The minimum deposit required can vary depending on the bank and the type of CD.
Term: You choose the term or duration of the CD, which can range from a few months to several years. Common terms include 6 months, 1 year, 2 years, 5 years, and so on. During this period, you agree not to withdraw the funds, except in certain circumstances that might incur penalties.
Interest Rate: The bank offers you an interest rate that is fixed for the entire term of the CD. The interest rate may be higher than what you would earn in a regular savings account because you commit to leaving the money untouched for the agreed period.
Interest Payments: Depending on the terms of the CD, interest payments can be structured in different ways. In some cases, you may receive the interest periodically (monthly, quarterly, annually) via direct deposit or have it credited to the CD account. Alternatively, the bank may offer a cumulative CD where the interest is added to the principal and paid out at the end of the term.
Maturity: Once the CD reaches its maturity date, the term ends. At this point, you have the option to withdraw the principal plus the accumulated interest, renew the CD for another term, or make changes to the account. If you do not take any action, some banks automatically renew the CD under the same terms.
Bank CDs are considered low-risk investments because they are insured by the Federal Deposit Insurance Corporation (FDIC) in the United States, up to certain limits. This means that even if the bank fails, your deposit (up to the insured amount) is protected.
CDs are suitable for individuals who have a specific amount of money they can set aside for a predetermined period without needing immediate access to the funds. They offer a stable and predictable return on investment, making them popular for risk-averse investors seeking a more secure way to grow their savings.