Certificates of deposit

The certificate of deposit is the U.S. retail-banking system's principal term-deposit product. The customer commits funds for a defined period — anywhere from one month to ten years, with the most common consumer terms being three months, six months, one year, two years, and five years — and receives a fixed (typically) interest rate higher than the rate available on a comparable demand deposit. In exchange for the longer commitment, the bank gets liability funding it can model and price against assets of similar duration, and the depositor gets predictable income.

This article describes how a CD works, how interest is paid, what an early-withdrawal penalty looks like in practice, and the principal variants: brokered CDs, callable CDs, no-penalty CDs, and IRA CDs. For the laddering strategy that combines CDs of different maturities, see CD ladders; for the broader context of time deposits in the bank's funding mix, see how banks make money.

The basic structure

A CD has three defining terms: principal, rate, and maturity. The depositor places a fixed amount of principal in the account at opening; the bank pays a fixed annual percentage yield over the term; at maturity, the bank returns the principal plus accumulated interest. The disclosed APY is set at opening and (for a standard fixed-rate CD) does not change during the term, regardless of how market rates move.

Most CDs are non-negotiable — they cannot be sold to a third party, only redeemed at the issuing bank — and have a stated denomination set by the depositor at opening. The minimum deposit varies by institution and product, from as low as $500 at some banks to $10,000 or more at others; "jumbo" CDs typically refer to those with $100,000 or higher minimums, sometimes carrying slightly higher rates.

The CD is a deposit for purposes of FDIC deposit insurance (and NCUA share insurance at credit unions). CDs at the same bank are aggregated with other deposits under the same ownership category against the $250,000 limit.

How interest is paid

CD interest is computed under the APY methodology of Regulation DD; see APR versus APY. The bank discloses the APY at account opening, and the actual interest earned over the term is the principal times the APY (compounded over the term). Compounding is typically daily, with crediting either monthly, quarterly, semi-annually, annually, or at maturity, depending on the product.

How the interest is paid is a meaningful choice. The standard options are:

• Credit to the CD: interest is added to the principal at each crediting interval and compounds within the CD until maturity.
• Transfer to another account: interest is credited to a designated checking, savings, or money-market account at the bank, leaving the CD's principal flat.
• Mail a check: interest is sent by check (historically common, now rarely used).

For a depositor who wants the CD as an income-producing instrument (a retiree, for example), the transfer-to-checking option allows the interest to be spent without breaking the CD. For a depositor who wants the highest terminal value, credit-to-CD provides the most compounding.

The early-withdrawal penalty

The single most important term to understand on a CD is the early-withdrawal penalty. If the depositor needs the funds before maturity, the bank will return the principal but charge a penalty that varies by institution and by the term of the CD. Typical penalty schedules:

• For CDs with terms under 12 months: 90 days of simple interest on the amount withdrawn.
• For CDs with terms of 12 to 36 months: 180 days of simple interest.
• For CDs with terms over 36 months: 365 days or more of simple interest.
• For some products: a flat percentage of the principal or interest, or a tiered structure that varies with how much of the term has elapsed.

The penalty is taken from interest first; if the interest accrued at the time of withdrawal is less than the penalty, the difference is taken from principal. A consumer who breaks a CD early in the term can therefore end up with less than the original principal — a possibility that should always be confirmed against the specific account agreement. The penalty is disclosed at account opening under Regulation DD.

Variant types

Brokered CDs. A brokered CD is issued by a bank but sold to depositors through a brokerage firm. The brokerage holds the CD in the customer's brokerage account and may offer a secondary market in the CD, so that the customer can sell it before maturity rather than breaking it (the sale price depends on prevailing rates and may be less than face). Brokered CDs are typically offered in $1,000 increments, sometimes with higher rates than direct CDs at the same bank, and the FDIC insurance attaches to the underlying bank — the brokerage holds the CD as custodian for the customer.

A note of caution on brokered-CD insurance: a customer who already holds direct deposits at the same bank as the brokered CD's issuer must aggregate the two for insurance purposes; the FDIC limit applies per bank per ownership category, not per channel. Some brokerages run programs that distribute funds across many partner banks specifically to multiply FDIC coverage; the program's structure should be examined to verify the pass-through coverage works as marketed.

Callable CDs. A callable CD gives the bank the right (not the obligation) to redeem the CD early on defined dates, returning the principal and accrued interest to the depositor. The bank typically calls when prevailing rates have fallen below the CD's rate, which is precisely when the depositor would have preferred to keep the higher rate. The disclosed APY on a callable CD is typically higher than on a non-callable CD of the same maturity to compensate for the call risk. Callable CDs are most commonly offered through brokerage channels.

No-penalty CDs. Some banks offer CDs that can be redeemed without penalty after a defined initial holding period (often seven days). The APY is typically lower than on a comparable standard CD. The product is functionally similar to a savings account with a rate lock; for a depositor who values both rate certainty and liquidity, it splits the difference.

IRA CDs. A CD held inside a bank IRA — the tax wrapper holds the deposit. The CD operates identically to a non-IRA CD; the tax treatment is determined by the IRA, not by the CD. See IRAs at a bank.

Variable-rate CDs. Some CDs pay a rate that adjusts during the term, either against a published index (the federal funds rate, the prime rate) or by a defined "bump" provision allowing the depositor to elect a one-time rate increase if market rates rise. The product is less common in the consumer space and is best understood by reading the specific disclosure.

Maturity and renewal

At maturity, the depositor typically has a grace period (commonly seven to ten days) to either withdraw the funds, transfer them to another product, or let the CD automatically renew. The automatic-renewal default is the bank's behavior if no instruction is received; it typically renews at the then-current rate for the same term, which may be very different from the original CD's rate. The depositor's failure to act during the grace period is treated as consent to renewal.

For depositors who want to optimise around the CD's maturity, the grace period is a critical interval. The bank's renewal-default behavior is in the account-opening disclosure and on the maturity notice the bank sends in advance; both should be read carefully.

Limits and uncertainty

CDs as a product category are stable; the variants and pricing change with the rate cycle. Live competitive dynamics include the persistent rate gap between branch-heavy and online-first CD rates (the latter typically materially higher), the growth of brokered-CD channels, and the question of whether the rise of money market mutual funds and Treasury-bill ETFs in retail brokerage accounts has structurally narrowed the appeal of CDs for some depositors. The underlying instrument — a fixed-rate insured time deposit — has been a U.S. retail-banking product for a century and is durable.