Legal Definitions - certificate of deposit (CD)

A Certificate of Deposit (CD) is a type of savings account that requires a fixed amount of money to be deposited for a fixed period of time. During this time, the account earns interest, which is paid out by the bank. The money must stay in the account for the entire predetermined time, and there may be penalties for withdrawing it early. The interest rate depends on the bank's savings and money market products.

Let's say you have $5,000 that you don't need to use for a year. You could deposit it into a CD with a bank that offers a 2% interest rate. This means that after a year, you would earn $100 in interest. However, if you need to withdraw the money before the year is up, you may have to pay a penalty.

Another example could be if you have a long-term savings goal, such as saving for a down payment on a house. You could deposit a portion of your savings into a CD with a longer term, such as five years, to earn a higher interest rate than a traditional savings account.

These examples illustrate how a CD works by showing how it can be used to earn interest on a fixed amount of money for a fixed period of time. It's important to remember that CDs may not be the best option for everyone, as there are penalties for early withdrawal and the interest rates may not be as high as other investment options.