certificate of deposit

certificate of deposit (CD), a receipt from a bank acknowledging the deposit of a sum of money. Two common types are demand certificates of deposit and time certificates of deposit.

• Demand certificates of deposit.These CDs are payable on demand; they’re used primarily by contractors as evidence of good faith when submitting a bid or as a guaranty of performance. They may also be used as collateral to secure a loan. Demand CDs typically pay no interest.
• Time certificates of deposit.These CDs bear interest and are payable on or after a specific date (the “maturity date”). Interest on time deposits is higher than for regular savings accounts. Because of this, a depositor who withdraws money deposited on a time basis before the maturity date of the CD is subject to loss of interest, typically three to six months’ worth. When retail investors speak of CDs, they’re usually referring to time deposits.

Each bank sets its own CD interest rates and maturity dates (e.g., six months, one year, two years, five years), but rates tend to rise and fall in line with the corresponding dates on the yield curve.

In the United States, bank-issued CDs are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account (as of 2023). In the United Kingdom, deposits are insured up to £85,000 under the Financial Services Compensation Scheme (FSCS).