Certificate of Deposit (CD)

Definition

A certificate of deposit (CD) is a product offered by banks and credit unions in which a customer deposits a lump-sum amount and leaves it untouched for a predetermined period of time, while it grows over time via a locked-in interest rate. CDs are appealing to many investors as they provide a safer and more conservative investment alternative to stocks and bonds, offering lower opportunity for growth, but with a non-volatile, guaranteed rate of return. Although you lock into a term of set duration when you open a CD, there are options for exiting early should you encounter an emergency or change of plans. Most banks, credit unions, and brokerage firms offer a menu of CD options. The top nationally available CD rates are typically three to five times higher than the industry average for every term.

News

Last week, the Federal Reserve raised its benchmark federal funds rate by 50 basis points (bps), representing the central bank’s largest rate hike in over two decades. This could have several effects on investors, among them higher interest rates on short-term, money market securities including certificates of deposit.?Rates on CDs tend to track the Federal Funds rate very closely, as these securities have a short term to maturity, while banks tend to adjust their rates on financial products to reflect changes in the federal funds rate. Higher interest rates equate to higher rates on CDs and other similar products, and vice versa. For investors seeking the relative safety and low risk of CDs, now might be an optimal time to secure a higher rate. It may be prudent for CD investors to assess their options across different banks, as rates vary depending upon the issuer, and finding the right term and interest rate is important for any long-term investment. Remember, any rate changes only impact newly-issued CDs, not existing CDs you may already be invested in.