What Is a CD (Certificate of Deposit)?
A Certificate of Deposit (CD) is a savings product offered by banks and credit unions that pays a fixed interest rate in exchange for keeping your money deposited for a set term. CDs typically offer higher interest rates than regular savings accounts because you agree not to withdraw the funds until the maturity date.
CD terms typically range from 3 months to 5 years. The longer the term and the larger the deposit, the higher the rate banks typically offer. At maturity, you receive your original deposit plus the interest earned. Early withdrawal usually incurs a penalty.
CD Formula
CDs use compound interest: A = P × (1 + r/n)^(n×t), where P = principal, r = annual rate, n = compounding periods per year, t = time in years.
Frequently Asked Questions
What is the difference between APY and APR for CDs?+
APR (Annual Percentage Rate) is the nominal interest rate before compounding. APY (Annual Percentage Yield) accounts for the effect of compounding and reflects the actual annual return. For CDs, banks always advertise APY. The more frequently interest compounds, the higher the effective APY relative to the APR.
Are CDs FDIC insured?+
Yes. CDs held at FDIC-insured banks are covered up to $250,000 per depositor, per institution, per ownership category. CDs at NCUA-insured credit unions have equivalent coverage through the NCUSIF. This makes CDs one of the safest savings vehicles available.
What happens if I withdraw from a CD early?+
Most CDs charge an early withdrawal penalty, typically equal to 3–6 months of interest for short-term CDs and 6–12 months of interest for longer-term CDs. Some "no-penalty CDs" allow early withdrawal without fees, but they usually offer lower rates.