A fixed rate certificate of deposit (or CD) is a type of investment product offered by banks and other institutions, which is very similar to a checking or savings account. However, when you purchase a CD, you are making what is called a “time deposit” in the bank – a deposit which you cannot touch for a specified period of time, and which bears interest which is compounded periodically.
A fixed rate CD is the most common type of CD. Variable rates, “bump-up” rates, and rates tied to an index such as the stock market, are less common. However, a fixed rate CD offers you the security of knowing that your interest rate will not fluctuate over the life of the investment. When interest rates are high, you can lock in the best CD rates and keep them over the life of the CD. In that respect, even though the interest rate of the CD is generally considered low when compared to some other investments, buying a certificate of deposit is usually considered one of the least risky investments out there.
Like a savings account, your certificate of deposit is insured by the FDIC. However, unlike a savings account, a CD is a type of time deposit, which means that it has a specific, fixed term. When you put money in a CD, you do so with the expectation that it will be held there for the entire term. There are generally stiff penalties for early withdrawal from a CD account.
You can buy a certificate of deposit for various terms. Some typical CD terms would be a three month, six month, one year, or five year CD. The longer term CDs generally offer the best CD rates, and CDs almost always carry a better interest rate than savings accounts from which money can be withdrawn at will. Fixed rates CDs are the most common, which protects your certificate of deposit from the fluctuations of the stock market. However, some banks offer CDs with a “bump-up” feature, which will allow for a single readjustment of the CD’s interest rate during the term of the CD. Shop around to see what the best certificate of deposit rates are in your area.