Certificate of Deposit (CD)

ByNathan Paulus
Edited byVictoria Copans

Updated: August 17, 2023

ByNathan Paulus
Edited byVictoria Copans

Updated: August 17, 2023

Advertising & Editorial Disclosure

A certificate of deposit (CD) is a savings instrument into which you put a set sum of money for a predetermined period, known as the term. In exchange for the term commitment, banks and credit unions typically offer a higher interest rate compared to regular savings accounts. CDs are considered low-risk because they offer a guaranteed rate of return and are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum allowed by law. This makes CDs an appealing choice for individuals who have a lump sum of money that they wish to save securely without needing immediate access to it.


How Certificates of Deposit Work

A CD is essentially a two-way promise between you and a bank or financial institution. When you invest in a CD, you give a certain amount of money to the bank for a specific period of time (the term). In return, the bank promises to pay you back your original investment plus interest. The important point is that you agree to leave your money with the bank for the entire term. If you withdraw your money before the term ends, you'll likely have to pay a penalty. But if you leave your money in for the full term, you're guaranteed to get back your original investment plus the agreed-upon interest.

The Bank’s Role in Issuing a Certificate of Deposit

Banks and financial institutions are the primary issuers of CDs. When someone decides to invest in a CD, the bank accepts their money and agrees to pay interest for the CD term. The bank sets the terms and conditions of the CD, including the interest rate, term length and penalties for early withdrawal. In addition to the issuer, banks simultaneously act as risk managers, financial intermediaries and regulatory compliance officers, ensuring that CDs serve the needs of both the customers and the banks themselves.


Certificate of Deposit Interest Rate

The interest rate will determine your return on investment. A higher interest rate means more earnings. However, rates can vary based on the term length and the bank's offerings. Comparing interest rates across different banks and CD terms is an important step in maximizing returns from a CD investment.

Banks set interest rates based on various factors, including market conditions, term length, liquidity needs and competition.

  • Interest rates may be based on market conditions, the overall state of the economy and the federal funds rate set by the central bank. If the central bank's rates are high, banks usually offer higher interest rates on CDs to attract more deposits.

  • Generally, the longer the term of the CD, the higher the interest rate. This is because the customer is agreeing to leave their money with the bank for a longer period, and the bank is willing to pay a premium for that commitment.

  • If a bank needs to increase its liquidity (its amount of readily available funds), it might offer higher interest rates on CDs to encourage more deposits.

  • Banks also look at what their competitors are offering and may adjust their rates accordingly to attract customers.

Although banks have some discretion in setting their rates, they are still subject to market forces and regulatory constraints. Therefore, the rates offered on CDs can vary from bank to bank and over time.

How to Calculate Certificate of Deposit Interest

The interest on a Certificate of Deposit (CD) can be calculated using the formula for compound interest. The formula is:



  • A is the amount of money accumulated after n years, including interest
  • P is the principal amount (the initial amount of money)
  • r is the annual interest rate (in decimal form, so 5% would be 0.05)
  • n is the number of times that interest is compounded per year
  • t is the time the money is invested for, in years

To calculate the interest earned, you can subtract the initial principal (P) from the final amount (A). The result will be the interest earned on the CD.


Remember that the rate and the number of compounding periods can vary depending on the terms of the CD. Some CDs compound interest annually, while others do it quarterly, monthly or even daily. Always check the terms of your CD for accurate calculations.

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Use MoneyGeek’s Compound Interest Calculator during your CD search to calculate your yield!

Certificate of Deposit Maturity Date

The maturity date of a Certificate of Deposit (CD) is when the term of the CD ends. On this date, the money you have deposited in the CD, along with the accrued interest, becomes available for you to withdraw.

The bank sets the maturity date when you open the CD depending on the term length of the CD that you choose. CD terms can range from a month to several years. Common term lengths include six months, one year, 18 months, two years, three years and five years, but the available terms can vary depending on the bank.

Withdrawing money before the maturity date can result in early withdrawal penalties, typically a loss of some or all of the interest that has been earned. The exact penalties can vary depending on the bank and the CD term.


Longer CD terms generally have higher interest rates. This is because when a customer commits their money for a longer period, the bank gains more certainty and stability in its funds, which it can then use for lending or other investment purposes. To incentivize customers to commit their money for longer periods, banks offer higher interest rates as a form of reward.

Certificate of Deposit Principal

The principal of a Certificate of Deposit (CD) refers to the initial sum of money that a customer deposits into the CD. The principal does not include the interest that accumulates over the term of the CD. At the end of the term, the customer receives back the principal along with the accrued interest unless they choose to reinvest it in another CD.

The minimum principal balance can vary widely depending on the financial institution. A common minimum deposit for many banks and credit unions is $500 or $1,000. Some institutions (particularly online banks) may offer CDs with no minimum deposit requirement, whereas others (especially for special types of CDs or for higher interest rates) may require a minimum deposit of $10,000 or more.

Advantages and Disadvantages of CDs

As with any investment vehicle, CDs come with their own unique set of advantages and disadvantages. CDs can be a valuable part of a diversified investment portfolio, offering low-risk options for investors seeking a guaranteed return. However, they may not equally meet the needs or goals of all investors.


How to Invest in a Certificate of Deposit

Investing in a CD is a process that involves several key steps and considerations.


Identify Your Financial Goals

Before investing in a CD, it's important to understand your financial goals. Are you saving for a short-term goal, like a vacation or a down payment on a car, or are you looking for a safe place to park your money for a few years? Your goals will help determine the term length and type of CD that is best for you.


Research Different Banks and Credit Unions

Not all banks and credit unions offer the same terms and interest rates on their CDs. Spend some time researching different institutions to find the best rates. Don't forget to check online banks, which often offer competitive rates.


Choose the Right Term Length

CDs come in a variety of term lengths, from one month to five years or more. Generally, the longer the term, the higher the interest rate. Choose a term length that aligns with when you'll need access to your money.


Consider CD Strategy

When investing in a CD, it's beneficial to consider a CD strategy like a laddering or barbell strategy. These strategies can help optimize returns, manage liquidity and align with your financial goals, making your investment more effective.


Decide on the Amount to Invest

Determine how much money you want to invest in the CD. Keep in mind that you won't be able to access these funds without penalty until the CD matures.


Open the CD

Once you've chosen a bank, term length and investment amount and strategy, you can open the CD. This process can usually be done online, over the phone or in person at a branch. You'll need to provide some personal information and the funds for your initial deposit.


Wait for Maturity

After you've opened the CD, your job is to wait for it to mature. During this time, your money will earn interest. Most banks will send you a notice as your maturity date approaches.


Decide What to Do at Maturity

When your CD matures, you'll have a few options. You can withdraw your money, renew the CD or roll it into a different CD. If you don't make a choice, many banks will automatically renew the CD for the same term.

Certificate of Deposit Types

Choosing between different types of CDs is an important step in the investment process. The type of CD that's best for you depends on your financial goals, your need for liquidity and your risk tolerance. Here is a list of the many available CD products.


Certificate of Deposit Investing Strategies

Investing in CDs can be more than just a one-time transaction. By employing certain strategies, investors can maximize their returns and manage their liquidity needs more effectively. Here are a few common CD investing strategies.

CD Laddering

This strategy involves purchasing several CDs with different maturity dates. For example, instead of investing $15,000 in a single five-year CD, you could invest $3,000 in a one-year CD, $3,000 in a two-year CD and so on up to a five-year CD. When each CD matures, you reinvest the funds in a new five-year CD. This strategy provides regular access to funds, reduces the risk of locking in a low rate for a long period and generally results in a higher average return over time.

CD Barbell Strategy

In this strategy, you invest in short-term and long-term CDs, but not in medium-term CDs. The idea is to take advantage of higher interest rates on long-term CDs while keeping some funds accessible in short-term CDs. If rates rise, the short-term CDs can be reinvested at the higher rate sooner.

CD Bullet Strategy

This strategy involves investing in several CDs that all mature at the same time. For example, in the first year, you could buy a three-year CD. In the second year, you buy a two-year CD, and the following year, you buy a one-year CD. After three years, all CDs will mature at the same time. This strategy can be useful if you have a specific future cash need.

Comparing Certificates of Deposit With Other Investment Options

CDs are just one of many investment options. Here's how they compare with some common alternatives.


Frequently Asked Questions

Certificates of deposit (CDs) can be purchased at banks, credit unions or through brokerage firms.

The typical minimum balance for a Certificate of Deposit (CD) can vary widely by bank, but it's often around $500 to $1,000.

If you cash in your CD before its maturity date, you'll typically incur an early withdrawal penalty. This penalty is often a portion of the interest earned and can sometimes even dip into the principal amount. The exact penalty depends on the terms set by the bank or credit union.

In general, you cannot lose your initial investment in a CD as they are insured by the FDIC up to the maximum allowed by law. However, you can lose out on potential interest earnings if you withdraw your money early and incur a penalty.

CDs are safe even if a bank fails because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum allowed by law, which is currently $250,000 per depositor, per insured bank, for each account ownership category.

Yes, the interest earned on a Certificate of Deposit (CD) is typically subject to federal income tax and possibly state and local taxes as well. The bank or credit union that issued the CD will send you a Form 1099-INT at the end of the year, which shows the amount of interest you earned. You must report this amount on your tax return.

About Nathan Paulus

Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.