What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is accurately described as a savings account with a fixed interest rate and a specified maturity date. When a person invests in a CD, they agree to deposit their money for a predetermined period, which can range from a few months to several years. In exchange for committing their funds for this period, the bank typically offers a higher interest rate compared to regular savings accounts.

This fixed interest rate means that the investor knows exactly how much they will earn over the life of the CD, allowing for predictable savings growth. Additionally, the maturity date is crucial because the investor cannot withdraw the funds without incurring penalties until that date arrives, making it a more restrictive but often more rewarding savings option.

In contrast to other financial tools presented in the choices, such as short-term loans, mutual funds, or checking accounts, the defining characteristics of a CD are its fixed interest rate, the commitment to keep the funds for a specific duration, and the purpose of saving rather than spending.