A certificate of deposit (CD) is a financial tool most commonly sold by banks and credit unions (seller).
The purchaser, you for example, buys a CD for a set amount of time called the term. The term length is typically, anywhere from 1 month to 10 years. If you keep that CD for the whole time, you will be paid a fixed interest amount that was set when the CD was set up.
One nice things about CDs is that they are protected by the FDIC for your bank or NCUA if you get it from a credit union, just like your savings and checking accounts.
Because you cannot redeem your money for a (long) period of time, the seller will offer you a higher rate of interest than something like a savings account which while a hassle, allows you withdraw money at almost any time.
CDs are considered non-liquid assets, since you cannot easily turn them into cash without penalty – usually just losing any interest accrued.
CDs are considered a very safe investment, and because they are safe, and because of other interest bearing factors, the interest rates are very low for CDs right now.
The other factor that controls the interest rate of a CD is the term length. The longer the term, the longer you have to wait to gain access to your money again, therefore the seller will pay you a higher interest rate. That means a CD which has a 6 month term, will not pay nearly the interest rate of a CD with a 3 year term.
Even with the higher rates of a multiyear CD, you may not find it to give you enough interest to make it a worthwhile investment.
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