Certificate of deposit (CD)

A certificate of deposit is a time deposit: you hand a bank a lump sum, the bank agrees to a rate and a term — anywhere from a month to several years — and you get principal plus interest back at maturity. Because the bank knows exactly how long it can use the money, CDs typically pay more than a savings account, and longer terms usually pay more than shorter ones.

CDs come in two broad flavors. Non-negotiable CDs are the retail product sold at bank branches; they cannot be sold to someone else, so the only way out before maturity is an early-withdrawal penalty. Negotiable CDs are large-denomination instruments, traditionally $100,000 or more, that trade in the secondary money market. A negotiable CD holder who needs cash sells the certificate rather than breaking it, which means the price can move with interest rates.

Deposits at insured banks are protected by federal deposit insurance up to the applicable per-depositor limit, which is why CDs are treated as one of the safest places to park cash. Any balance above that limit is uninsured, so a large negotiable CD leaves the holder with some credit exposure to the issuing bank. The other trade-offs are liquidity risk — the money is committed — and purchasing power risk, since a fixed rate locked in before a burst of inflation can leave the real return negative.

On the suitability side, CDs fit conservative objectives: capital preservation, a known payout date, and income without market exposure. They are a poor fit for an investor seeking growth or one who may need the funds on short notice.

The Series 7 covers CDs under bank issues and again under investment objectives, the Series 65 treats them in client profiling and in the definition of a security, and the CIMA Certificate in Business Accounting groups them with other short-term instruments a business uses to manage cash.