What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a type of fixed-term deposit account that has a specified interest rate and maturity date. When a customer opens a CD, they agree to keep their money deposited for a predetermined period, which can range from a few months to several years. In return, the financial institution offers a higher interest rate compared to regular savings accounts, providing a safe and predictable way to earn interest on savings during that time frame.

The structure of a CD benefits both the bank and the depositor. The bank utilizes the funds for lending or investment purposes while offering the security of a promised interest return to the customer. Customers benefit by receiving a fixed return, which can be particularly appealing in a low-interest-rate environment, and the limitations on access to the funds can encourage savings discipline.

In contrast, the other options describe accounts that do not offer the same characteristics and benefits as a CD. Options like the ability to withdraw funds at any time or having unlimited withdrawals relate more to savings or checking accounts, while trading stocks and bonds does not pertain to the fixed earnings and term arrangement that defines a CD.