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Finance Dictionary and Glossary of Investment Terms
Certificate of deposit (CD)
Also called a time deposit this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. A CD has a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.
CDs (certificates of deposit) are bank, credit union or savings and loan instruments that allow you to lock in an interest rate for a specific period of time (i.e. six months, one year, five years). If you withdraw your money from the CD before the CD matures, you are likely to be charged an early withdrawal penalty -- often three months'' interest. Generally, the longer you commit your money, the higher will be the interest paid. There is never a fee to purchase a CD.In many cases, the interest is not paid on a CD until it matures. However, for longer-term CDs interest may be credited to your account (or mailed out to you) every three or six months. To receive monthly checks, it generally would be necessary for you to stagger your CD purchases, buying one each month over a three- to six-month period.The amount of money you can make on a CD depends on the interest rate paid. For example, if a bank offers you a 5 percent yield on a one-year CD in which you invest $10,000, the quarterly interest payment would be about $125. An alternative would be to invest in a money market mutual fund, which pays about the same yield and generally pays monthly distributions.