1. Banking 101

Certificates of Deposit

A certificate of deposit (CD) is a savings certificate entitling the bearer to receive interest. In many ways, it is similar to a bond, except that instead of paying interest periodically over the life of the investment, it pays all its interest at once when it matures. Also, because CDs are a bank product, they come with FDIC insurance.2

A CD has a maturity date and a specified fixed interest rate and can be issued in any denomination. The term of a CD generally ranges from one month to five years. The amount of interest a CD pays depends on its term, with longer terms generally paying higher rates. CDs, like savings accounts, will pay more or less depending on market conditions.

In the low-interest rate environment, the United States has experienced since 2008, CDs have paid little, but they often pay more than an online savings account does, depending on which banks you’re comparing. The average 60-month (5-year) CD rate in June 2021 is 0.27%, significantly higher than the average jumbo savings account rate of 0.06%.16

Along with the higher interest rate you’ll earn with a CD come restrictions on withdrawing your money before the CD matures. Do so and it will usually cost you money in the form of an early withdrawal penalty.

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