Certificate of Deposit (CDs) : Basics, Risk profile, Types

Table of Contents

invest in certificate of deposits

A Certificate of Deposit is a savings account in which one invests money for a fixed period. They will get a fixed return at maturity which will be a sum of principal plus interest compounded monthly, semi-annually, or annually as promised by the issuer. The period of maturity can be chosen for a few month to years. They are considered one of the safest and are most conventional investment instruments. Issuer of Certificate of Deposit has to outline all conditions related to interest amount and  period of maturity in disclosure as per federal rule. They also have declare the mode of payment be the check or electronic. Other terms like penalties for withdrawal before maturity are to be clearly stated to the investor. All the banks that are federally insured have insurance amount of 250000$ per account name.

Types of CDs

Traditional cd

In these CDs, you make investments for a fixed period at a fixed interest rate. You can rollover also after maturity or liquidate it to your saving account. But in case you withdraw before maturity there is a heavy penalty. These penalty-related rules and charges are to be disclosed by the bank at the time of investment as per federal rules.


Brokered CDs

Banks sometimes use brokers to sell their CDs to compete in the market and usually offer higher interest rates. You do not need to open CDs at the bank rather take their delivery from a brokerage firm in the open marketplace. They can also be traded in the secondary market thus offering higher liquidity but the risk profile is comparatively poor compared to traditional CDs. There is no guarantee of return however the principal amount is guaranteed if you hold it till maturity. They are not always insured by FDIC. In case the brokerage firm is not partnered with federally insured banks then brokered CDs will not be insured.


Liquid CDs

Liquid CDs are non-penalty CDs thus you can withdraw funds before maturity without any sort of penalty. But this feature leads to a reduction in the interest rate offered. Thus select this option if you are uncertain about the availability of funds until maturity. However, if you are sure then you will not need funds during this time then traditional CDs are the best option to go with. Generally, banks have rules to not with before a few days otherwise there is a chance of penalty. However, any such rule is to be disclosed by the bank in advance.


High Yield CD

These CDs offer more lucrative interest rates to attract investors and compete in the market.



 IRA CD is targeted at investors seeking to invest in retirement funds. They offer tax advantages in retirement accounts. They are specially designed for people who want a guaranteed return in their retirement funds. They are insured by FDIC. They must be considered while diversifying your portfolio.


Equity-linked CDs

They are linked to the market. Their return is dependent on stock market indices performance like NASDAQ, S&P 500, etc. They are usually issued for multi-year terms and terms vary widely from one institution to another. Returns are wide and perform well only if the market performs well. They give extremely good returns during a bull run. Some equity-linked CDs offer a minimum rate of return also with variable components. In case of early withdrawal, there are provisions of penalty just like traditional CDs.


Bump-up Cd

They are good options to consider in the rising-rate scenario. Usually, one bump-up is allowed during the term. In case of a rise in annual percentage yield, you can request your bank to increase the rate offered at the time of investment for the rest of the period. However, Bump-up CDs offer comparatively lesser interest rates. Thus, they should always be preferred in case you are expecting an increase in interest rate in the future.


Callable CDs

These CDs are offered at higher interest rates because of their inherent feature of call (by the issuer or bank). Thus, in case there is a reduction in interest rate during maturity bank may call you to deposit and return the principal with interest for that period only. The new interest offered will be the reduced one. Thus, one should choose this option after assessing economic conditions properly.


Add-on CDs

Add-on CDs give an option of adding further funds to initial funds, unlike traditional CDs where once you fixed the fund you cannot alter it till maturity. However, there is an option of making partial additions only after a fixed span. And also, partial withdrawal cannot be done, there is a provision for addition only.

CDs vs other instruments

CDs vs ETFs

Certificate of deposits

Exchange trade funds

Guaranteed return

Dependent on market condition and may give negative return also.

Safer option

Safe but riskier than CDs

Liquidating before maturity lead to penalty and reduced return

Easy to liquidate

Return in long term may underperform.

They can generate better return in long term.

Insured by FDIC

No such inherent insurance but risk is reduced because of diversification instead of single stock.

CDs vs mutual Funds

Certificate of deposits

Mutual Funds.

Guaranteed return as per interest rate of issuing bank

Dependent on market condition and may give negative return also if underlying stock don’t perform well

Safer option as not dependent on market.

Safe but riskier than CDs

Liquidating before maturity lead to penalty and reduced return

Easy to liquidate and cash them whenever required.

Return in long term may underperform.

They can generate better return in long term.

Insured by FDIC up to 250000$

No such insurance is there.

Risk Profile of CDs

Though most of the certificates of deposits are insured by FDIC(Federal Deposit Insurance Corp.). the insured amount is only up to 250000$. However, the chance of a bank defaulting is negligible but still not zero. We have already witnessed issues with First Republic Bank which declared insolvency in 2023. in the 2007 financial crisis also Silicon Valley Bank got doomed. The key point to focus on is that FDIC covers 250000$  for all accounts in one bank, not individual accounts so it’s better to keep less than 250000$ in particular institutions.

CD ladder

What is CD ladder?

CD ladder is an investment technique that helps in optimizing the investment process and ensures you have availability of funds at the time you need it.

This technique involves the principal fund into parts and then investing them separately into CDs of different maturity periods. When CD with the lowest maturity period matures we invest this amount into a new CD with the highest maturity period

Frequently Asked Questions (FAQs)

How does certificate of deposit work?

You have to invest a fixed amount for which issuer bank issues a certificate of deposit. Bank will return the amount with added interest (as agreed) after maturity period. Usually interests offered in CDs account is higher than saving account.

Are CDs insured?

All certificate of deposit issued by banks or credit unions are FDIC insured. Insurance amount is 250,000$ and this amount is insured against one account not one CD.

What if I withdraw before maturity of CD?

Certificate of deposit is one of the best instrument if you are looking for term based investments with low risk profile. It is a good instrument to diversify port folio.

When to invest in CD?

  1. When you are looking for low risk low return investment.
  2. When you are sure that you are not in need of invested fund till maturity.
  3. When you are looking for diversification and have excess funds in saving account because you get lower return on funds in saving account.

How to invest in CD?

Just decide the investment period first then look for various option offered by banks like interest rates, early withdrawal penalty rules etc. Then apply for it via online gateway or offline to bank of your interest.

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