What is a certificate of deposit?
A certificate of deposit is an instrument or certificate issued by banks and other
financial institutions as a guarantee and acknowledgment that a customer has made a lump
sum payment into his account which will be fixed for a period of time in exchange for interest.
There are two important benefits attached to certificates of deposit. One, the deposit is safe and
insured. Two, the rates are often higher than normal interest rates on a bank savings account.
Four factors should be taken into consideration when a certificate of deposit account is to be
open: the interest rate, the duration or term of the deposit, the financial institution, and how
much is to be deposited (principal).
Certificates of deposit are also issued and operated by thrift institutions and credit associations
or organizations. Early withdrawals from this type of account often attract penalties that are
usually charged in the interest accrued. Another popular feature of a fixed deposit account is
that the longer the term of deposit, the higher the interest rates.