What does Certificate of deposit mean?

A certificate of deposit, or CD for short, is a savings certificate that entitles the bearer to receive some kind of interest. Certificates of deposit have a so called maturity date which means they have a certain validity period. They also have a fixed interest rate, and they can be issued in any denomination. They are typically issued by commercial financial institutions, and they are insured by the FDIC. The maturity period of a certificate of deposit normally has a range of one month to five years.

A CD in basically a promissory note that is issued by a bank. It is a deposit in time which restricts holders from getting money on demand. It is of course still possible to withdraw the cash invested, although this almost always results in the person withdrawing money gets penalized.

For instance, if an individual purchases a $10,000 certificate of deposit, having an interest rate of, say, 5%. The rate is compounded annually and its maturity is in one year. At the end of the year the certificate would have grown to $10,500.

There are multiple types of certificates, depending on the amount written in the CD. For example, the ‘small CDs’ are the ones that have a sum less than %100,000; while the ones over $100,000 are called ‘large CDs’ or ‘jumbo CDs’. Some of the small certificates as well as almost all of the big ones are negotiable.

A certificate of deposit is a low risk, low return investment, and is also known as a ‘time deposit’, since the account holder has signed an agreement saying he or she would keep the money in his or her account for a pre specified amount of time.