Financial Glossary: Certificate of deposit (CD)


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Certificate of deposit (CD)

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Certificate of deposit (CD)

Certificate of deposit (CD)

A Debt instrument from a financial Institution.

When you purchase a CD from your credit union (usually some multiple of $500 or $1,000), you're lending it that amount for a specific period, for which you'll earn a specific amount of Interest. If you want your money back early, you'll usually have to pay a Penalty.

A certificate of Deposit or CD is a time Deposit, a financial product commonly offered to consumers by banks, Thrift institutions, and credit unions.

Such 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 It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued Interest.

CDs typically require a minimum Deposit, and may Offer higher rates for larger deposits. In the US, the best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000 (though some, recognizing that some investors don't want more in the account than is covered by FDIC insurance, have lowered the minimum Deposit to $95,000). However there are also institutions that do the opposite and Offer lower rates for their "Jumbo CDs".

The consumer who opens a CD may receive a passbook or paper certificate, but it NOW is common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.

The CD market is a tiered market offering securities backed by different "names" and thus a Range of liquidities and yields. The creditworthiness of a bank is evaluated by impartial rating agencies such as Moody's and Standard and Poor's.

Posted by Institute for International Research

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