Definition

Certificate of Deposit is the saving certificate issued to the investor or individual to receive interest. Certificate of deposit is consisting of maturity date, fixed interest rate, and can be issued in any denomination. It is generally issued by commercial banks and it is insured by FDIC. Generally, the maturity of the certificate is ranging from one month to five years.

Explanation of Certificate of Deposit

Certificate of deposit is the promissory note issued by a bank. It restricts holders from the withdrawal of funds before its maturity, but there is a possibility of withdrawing the funds and action will be taken in terms of penalty.

For example, an individual bought a certificate at $10,000 with an interest rate of 5%, compounded annually with one year maturity. After a year, the certificate of deposit has grown to $10,500. Certificate less than $100,000 is called small certificates, while more than $100,000 is called large certificates. Certificates of deposit are the safest investment an individual can make.