LeoGlossary: Certificate of Deposit (CD)

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A Certificate of Deposit (CD) is a financial product offered by banks, thrift institutions, and credit unions in the United States. It is a type of savings account with specific features:

  1. Fixed Term: When you open a CD, you agree to deposit a certain amount of money for a fixed period of time, which can range)from a few months to several years. During this term, you generally cannot withdraw the money without incurring a penalty.
  1. Higher Interest Rates: CDs typically offer higher interest rates compared to regular savings accounts. The interest rate is fixed for the duration of the CD, which means it won't change with fluctuations in the market.
  1. Safety: CDs are considered low-risk investments because they are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. This insurance means that even if the bank or credit union were to fail, your CD funds, up to a certain limit, would still be protected.
  1. Lump-Sum Deposit: You usually need to make a lump-sum deposit when you open a CD. This means you need to deposit a specific amount of money upfront, and the CD will earn interest on that amount.
  1. Interest Earnings: The interest you earn on a CD can be paid out periodically, such as monthly or annually, or it can be added to the principal amount and paid out at the end of the CD's term.
  1. Penalties for Early Withdrawal: If you need to access your money before the CD's term ends, you will typically face penalties, which can include a loss of a portion of the interest earned.

CDs can be a good choice for individuals who want a safe and predictable way to earn interest on their savings. They are suitable for funds you don't need to access immediately and want to earn a higher interest rate than what a regular savings account offers. The specific terms, interest rates, and penalties associated with CDs can vary from one financial institution to another, so it's important to carefully read the terms and conditions before opening a CD.

Certificates of Deposits vs Savings Bonds

Certificates of Deposit (CDs) and savings bonds are both financial products that offer low-risk ways to save and invest money, but they have some key differences. Here's how they differ:

  1. Issuer:
    • CDs: CDs are typically offered by banks, credit unions, and other financial institutions. When you open a CD, you're essentially making a deposit with a financial institution.
    • Savings Bonds: Savings bonds are issued by the U.S. Department of the Treasury in the case of U.S. savings bonds. Other countries may issue their own savings bonds. They are essentially a Loan to the government.
  1. Purpose:
    • CDs: CDs are primarily savings accounts with a fixed term and a higher interest rate compared to regular savings accounts. They are used to grow savings over a set period.
    • Savings Bonds: Savings bonds are often considered long-term investments. They can be used for goals like saving for education, retirement, or other long-term financial needs.
  1. Term:
    • CDs: CDs have fixed terms that can vary from a few months to several years. Your money is locked in for this specific period, and withdrawing before the term ends typically results in penalties.
    • Savings Bonds: Savings bonds also have fixed terms, but these terms tend to be longer and can range from several years to several decades. They can be cashed before maturity, but you may receive less interest.
  1. Interest Rates:
    • CDs: CD interest rates are typically fixed for the duration of the CD. These rates are usually higher than those of regular savings accounts.
    • Savings Bonds: The interest rates for savings bonds can vary. Some may have fixed rates, while others have rates that adjust based on inflation. U.S. savings bonds, for example, have rates that adjust with inflation.
  1. Liquidity:
    • CDs: CDs are less liquid, meaning you can't easily access your money until the CD matures. Early withdrawals usually come with penalties.
    • Savings Bonds: Savings bonds can be cashed before maturity, but you may lose some interest, and there may be restrictions or penalties for doing so.
  1. Safety:
    • CDs: CDs are typically considered safe investments, especially when they are issued by banks and credit unions, which are often insured by the FDIC or NCUA. This means that even if the bank fails, your money is protected up to certain limits.
    • Savings Bonds: Savings bonds are backed by the government that issues them, making them one of the safest investments available.
  1. Marketability:
    • CDs: CDs are not generally tradable in the secondary market. They are typically held until maturity.
    • Savings Bonds: Some savings bonds can be transferred or sold in the secondary market.

In summary, both CDs and savings bonds are low-risk options for saving and investing money, but they differ in terms of issuer, purpose, term, interest rates, liquidity, safety, and marketability. Your choice between the two will depend on your financial goals, investment horizon, and risk tolerance.

History of Certificates of Deposits

The history of certificates of deposit (CDs) dates back several centuries, and they have evolved over time. Here's a brief overview of the history of CDs:

  1. Origins in Europe:
    • The concept of certificates of deposit can be traced back to European banks in the 1600s. European banks began issuing certificates to customers as a form of acknowledgment for deposits made. These certificates acted as evidence of the deposit and were the precursor to modern CDs.
  1. Early Use in the United States:
    • In the United States, banks started issuing certificates of deposit in the early 1800s. Similar to their European counterparts, these certificates represented deposits made by customers and were typically issued for fixed periods.
  1. Introduction of Federal Insurance:
    • In the 20th century, especially during the Great Depression, there was an increased focus on protecting bank deposits. To enhance depositor confidence, the U.S. government introduced federal insurance for bank deposits. This insurance guaranteed that deposits, including CDs, were safe even if a bank failed. The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to provide this coverage.
  1. Negotiable CDs:
    • In the early 1960s, negotiable certificates of deposit were introduced. These were CDs with high denominations, typically $100,000 or more, and they could be traded in the secondary market. This innovation allowed institutions and investors to buy and Sell these CDs before their maturity dates.
  1. Interest Rate Fluctuations:
    • CD interest rates have experienced significant fluctuations over the years. There have been times when CDs offered much higher interest rates, making them attractive for savers. For example, in the early 1980s, three-month CD interest rates peaked at over 11%.
  1. Evolution in the Digital Age:
    • With the advent of online banking and digital financial services, CDs have become more accessible, and customers can easily open and manage CD accounts through the internet.
  1. Modern Usage:
    • Today, certificates of deposit remain popular as a safe and low-risk savings and investment option. They are often chosen by individuals and institutions looking to earn a guaranteed interest rate over a fixed period while preserving their principal.

Overall, certificates of deposit have a long history of providing a secure way for individuals and organizations to save and grow their money, with their development closely tied to the evolution of banking and financial services.


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