A Certificate of Deposit, or CD, is a product offered by banks and credit unions that provides the opportunity to save money at a fixed interest rate for a certain period. CDs are very-low-risk investments and thus have become quite popular with people looking to increase their savings without exposing themselves to market volatility.
How do CD accounts work?
You agree to lock in a principal amount of money for some time, which could be months or even years. The bank pays you interest, and that interest is at a higher rate than what you would earn in a normal savings account. The basic characteristics of CDs include:
- Fixed interest rate: the rate is fixed once one opens the account and remains unchanged throughout the term.
- Maturity date: the date when the CD becomes available for the withdrawal of your principal amount together with the amount of interest you have accrued.
- Early withdrawal penalties: You are generally charged for early withdrawal before the maturity date, and it can even decrease your overall gain. The penalty is usually in the form of a few months’ interest.
Types of CDs
There are several types of CDs available in the market today and these serve varied financial goals and needs:
- Traditional CDs: These have fixed terms and fixed interest rates.
- No-Penalty CDs: Let you cash out before the maturity date, but usually at lower interest.
- Jumbo CDs: Larger minimum deposits tend to pay higher interest rates.
- Bump-up CDs: Most banks and credit unions will allow a bump-up of your interest rate should the market increase during your term.
- CD laddering: Laddering refers to the investment strategy where you stagger your CD investments to different maturity dates in order to keep your money liquid yet take advantage of competitive rates.
Returns on CD accounts
The return on a CD account is determined by the principal amount deposited, the interest rate offered by the bank, and the length of the term. Here are the average annual percentage yields, APYs, being offered for CDs of varying terms as of early 2025:
- 1-Year CD: about 4.10% APY
- 3-Year CD: about 3.50% APY
- 5-Year CD: about 3.50% APY
To give you an idea of what you might earn at different levels of investment with varying interest rates, here are some calculations for a one-year term:
| Investment Amount | 1.88% APY | 4.00% APY | 5.00% APY |
| $1000 | $1,018.80 | $1,040.00 | $1,050.00 |
| $5,000 | $5,094.00 | $5,200.00 | $5,250.00 |
| $10,000 | $10,188.00 | $10,400.00 | $10,500.00 |
| $25,000 | $25,470.00 | $26,000.00 | $26,250.00 |
| $50,000 | $50,940.00 | $52,000.00 | $52,500.00 |
These are the amounts you would earn at different rates depending on your original investment after one year.
Factors that affect your earnings
Several factors can affect how much you earn from a CD:
- Interest rates: High rates mean good returns; as such, one should always be on the lookout for competitive offers.
- Term length: The longer the term, the higher the rates go, but the longer your money is also locked in.
- Investment amount: Bigger deposits can earn higher interest rates or maybe even special promo rates.
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