Certificate Of Deposit (CD) Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Certificate Of Deposit (CD), written in plain English, along with examples of how it is used.
What is Certificate Of Deposit (CD)?
(n) Certificate of Deposit is the document issued by commercial and other saving banks certifying the deposit made by the holder containing the interest and maturity date of the deposit. CDs are issued for deposit for a definite period and when the depositor can collect periodical interest.
History and Meaning of Certificate Of Deposit (CD)
A Certificate of Deposit (CD) is a financial product offered by banks and other financial institutions, in which the depositor agrees to leave a certain amount of money on deposit for a specified period of time, in exchange for a fixed rate of interest. The depositor receives a certificate as evidence of the deposit made and the interest rate offered. The holder of the CD cannot withdraw the money until the maturity date without incurring a penalty.
Certificates of Deposit have been around since the early 1960s and were initially offered by commercial banks to attract funds from retail customers. CDs were originally offered with fixed interest rates and fixed maturities ranging from 3 months to 5 years, but now they can have variable interest rates and maturities. They are considered to be relatively low-risk investments since they are FDIC-insured (up to $250,000 per depositor per account in the USA) and have a guaranteed fixed rate of return until maturity.
Examples of Certificate Of Deposit (CD)
- John invested $5,000 in a 2-year CD at his local bank with an interest rate of 2.5% per year.
- Sarah deposited $10,000 in a 6-month CD with interest payable at maturity.
- Michael put $20,000 into a 3-year CD with a fixed interest rate of 3.25% per annum.
Legal Terms Similar to Certificate Of Deposit (CD)
- Time deposit: A deposit held by a financial institution for a fixed term that earns a fixed interest rate.
- Fixed deposit: A deposit account in which the depositor agrees to leave the money on deposit for a fixed term at a fixed interest rate.
- Term deposit: A savings account that earns a fixed interest rate for a fixed term, similar to a certificate of deposit.