Certificate of Deposit (CD)
A Certificate of Deposit (CD) is a financial product offered by banks and Credit unions that provides a fixed Interest Rate for a specified term. When an individual purchases a CD, they agree to deposit a certain amount of Money for a predetermined period, which can range from a few months to several years. In exchange for leaving their funds untouched for the duration of the term, the investor typically receives a higher Interest Rate compared to a regular Savings Account.
For example, if a person deposits $5,000 into a 2-year CD with an Interest Rate of 2.5%, they will earn interest on that amount over the term. At maturity, they would receive their initial deposit plus the Accrued Interest.
In cases where funds are withdrawn before the maturity date, penalties often apply, which can reduce the overall earnings from the investment. For instance, if the early withdrawal penalty is three months’ interest, a person who withdraws their funds after one year might forfeit some of the interest earned.