What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a financial product offered by banks and credit unions that allows customers to deposit a sum of money for a fixed term, usually ranging from a few months to several years. During this term, the bank pays a fixed interest rate, which is typically higher than that of regular savings accounts. At the end of the term, the customer receives their initial deposit plus the interest accrued. This fixed nature makes CDs a secure investment option, as the interest rate remains unchanged throughout the duration of the term, regardless of market fluctuations.

In contrast to other financial products mentioned, a checking account does not typically offer fixed interest rates and may carry monthly fees, while an investment account might deal with variable interest rates, which can change based on the market. A loan product generally involves borrowing money rather than depositing it, and instead of earning interest, the borrower pays it. Thus, the unique features of a certificate of deposit distinctly set it apart as a savings instrument with a fixed interest rate for a specific term.