Certificate of Deposit (CD) is a safe way to invest money. It is a time-based deposit product that can help you earn higher interest rates than your savings or checking account. You can get a certificate of deposit from any bank, credit union, or brokerage firm that offers this product. But before you choose one, it’s crucial to understand how CDs work and how they compare to other types of investments.

## What is a certificate of deposit? – Definition

A certificate of deposit (CD) is a savings account offered by banks and credit unions. A CD can be opened by anyone with an interest in earning more interest on their money.

CDs are insured and guaranteed, so you don’t have to worry about losing your principal if the bank fails. They also offer fixed rates that ensure you’ll get the same amount back when you withdraw it as what was initially deposited, no matter how long it stays in your account (though some banks will charge fees for early withdrawal).

## How does a certificate of deposit work?

When you purchase a certificate of deposit, you agree to leave your money in the bank for a certain amount of time. The term length varies by institution and can be anywhere from three months to seven years. You earn interest on your deposit that increases as the term length grows longer.

You cannot withdraw your money before the end of this period without incurring some kind of penalty (though there are exceptions). If you do need to get access to it before then, make sure to plan ahead!

The upside is that if you do stay invested long enough, there are often substantial rewards associated with investing in CDs.

## Formula

In order to calculate the final balance you will have after the specified amount of time, you can use the formula:

\text {Final balance} = \text {Initial deposit} \times (\frac {1+\text {Annual interest rate}}{\text {Compounding frequency}})^{\text {Term} \times \text {Compounding frequency}}

## History

If youâ€™re interested in learning more about certificates of deposit (CDs), itâ€™s important to know where they came from. CDs have been around since the early 1900s and were originally used by banks. They started out as a way for banks to save money and store cash, but theyâ€™ve evolved over time into something that people use today to invest their savings while gaining interest in their investments.

Nowadays, CDs are often marketed as safe investments that pay higher returns than savings accounts doâ€”and thereâ€™s some truth behind this claim! But before you sign up for a CD account at your bank or credit union, make sure you understand how they work so that you can make an informed decision about whether or not investing in one is right for your financial goals and needs.

## FAQ

### What is a bank certificate of deposit?

The definition of a certificate of deposit is an account that allows you to save money typically at a fixed interest rate for a fixed amount of time.

### Can you lose money with CDs?

If a CD is sold on the secondary market at a lower value than its face value, it will have lost money.

### Can you live off CD interest?

You can live off the interest alone, but you need to be careful about understanding your expenses and your current and future assets.