Understanding CD or, Certificate of Deposit

Understanding CD or, Certificate of Deposit

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Certificate of deposit (CD) is a financial instrument issued by banks and other financial institutions that pays a fixed interest rate for a fixed period of time. CDs are a type of time deposit, which means that they are locked in for a specific period, usually ranging from 3 month to 3 years. During this period, the CD cannot be withdrawn without paying a penalty. Certificates of deposit are issued by scheduled commercial banks (SCBs) and other financial institutions. SCBs use the funds to lend to their customers or to invest in other financial instruments. CDs are a low-risk investment and are insured which means that in case the bank fails, the depositor will be protected.

The main difference between certificate of deposit and fixed deposit is that the former is freely negotiable FDs are not. Apart from it, they are very much similar to each other as both of them are time deposits, require a minimum amount for deposit and have similar time period. Certificate of deposits typically offer higher interest rates than savings accounts because the depositor is locking in the funds for a specific period of time. The longer the term of the CD, the higher the interest rate offered. CDs are also a good option for individuals who want to earn a guaranteed return on their investment without taking on too much risk.

One of the advantages of bank certificate of deposit is that they offer a fixed interest rate, which means that the depositor knows exactly how much they will earn on their investment. This is in contrast to other types of investments, such as stocks and mutual funds, which offer variable returns that can fluctuate based on market conditions. However, CDs also have their limitations. One of the main limitations is that they are not very liquid. The depositor cannot withdraw the funds without paying a penalty, which can be a significant deterrent for some investors. Additionally, CDs typically offer lower returns than other types of investments such as stocks and mutual funds.

Thus, certificate of deposits are a type of time deposit issued by banks and other financial institutions. They offer a fixed interest rate for a fixed period of time and are a good option for individuals who want to earn a guaranteed return on their investment without taking on too much risk.