Certificate of deposit
By Jude Wallis
A certificate of deposit, or CD, is a bank deposit committed for a fixed term at a rate agreed when it is opened. Withdrawing before the term ends usually costs an interest penalty.
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The trade is liquidity for certainty. The rate is fixed for the term, so a saver knows the ending balance in advance, and in exchange the money is committed. Two CDs are compared on APY rather than on a stated rate, because APY already contains the compounding frequency.
The early withdrawal penalty is the term that decides whether a longer CD is right. Quoted as some number of months of interest, it can exceed everything earned so far on a CD closed early, and on some terms it can reach into principal.
A ladder is the usual answer: several CDs maturing at staggered dates, so some money comes free regularly while most of it stays on longer rates. The CD calculator grows a deposit at a stated APY, how CD ladders work is the structure, and FDIC insurance is the deposit protection.