What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a savings product offered by banks and credit unions that provides a fixed interest rate for a predetermined period of time, typically ranging from a few months to several years. When an individual opens a CD, they deposit a specific amount of money, which they agree to leave untouched until the maturity date. In return, the financial institution pays a higher interest rate compared to traditional savings accounts. This makes CDs an attractive option for those looking to earn a guaranteed return on their savings without the risk associated with investments in the stock market.

The nature of CDs requires that the investor keeps the money deposited for the entire term to receive the promised interest. If the funds are withdrawn before this period ends, penalties often apply, reducing the overall interest earned. This structure aids individuals in planning their savings goals, such as saving for a major purchase or building an emergency fund.

In contrast, the other choices describe products or financial instruments with different characteristics and purposes, such as investments in equities and bonds, loan structures for businesses, and transaction accounts with no fees. These do not align with the definition and features of a certificate of deposit.