What is a certificate of deposit?

A certificate of deposit (CD) is indeed a loan made to a bank for a fixed period yielding interest. When you purchase a CD, you are essentially agreeing to deposit your money with the bank for a specified term, such as six months, one year, or longer. In return for your commitment to keep your money in the account for that duration, the bank pays you interest, typically at a higher rate than a regular savings account. This interest payment is guaranteed, making CDs a low-risk investment option.

The fixed term means that you generally cannot withdraw your funds before the maturity date without incurring a penalty, which further incentivizes the bank to offer higher interest rates. This feature is appealing to individuals looking for a conservative way to earn interest on their savings over a set timeframe.

In contrast, other options misrepresent the nature of a CD. A savings account with a high interest rate does not involve locking funds for a specific period and usually allows for easier access to funds. Mutual fund investments consist of pooling money from various investors to purchase securities, which is entirely different from the straightforward savings nature of a CD. Lastly, an insurance policy for deposits does not accurately define a CD, as it relates to the protection of deposits, such as through