How CDs work
A certificate of deposit (called a term deposit or fixed deposit in many countries) pays a fixed, guaranteed rate in return for you agreeing not to touch the money for a set term — commonly 3 months to 5 years. Because the bank can count on the funds, CDs usually pay more than an ordinary savings account. Since the APY already reflects compounding, this calculator applies it over your term to give the maturity value.
The trade-off: rate for access
The catch is liquidity. Withdraw before maturity and you'll typically pay an early-withdrawal penalty — often several months of interest — that can wipe out much of your gain. CDs suit money you know you won't need until a specific date: a planned purchase, an emergency-fund tier you won't touch, or the safe portion of a portfolio.
Strategies worth knowing
- CD laddering: split money across CDs of staggered maturities (say 1, 2, 3, 4, 5 years). One matures each year, giving regular access while most of your money earns the higher long-term rates.
- Rate environment matters: lock in long terms when rates are high; stay short when you expect rates to rise, so you can reinvest sooner.
- Compare APY, not the nominal rate — APY includes compounding and is the honest basis for comparing CDs across banks.
Safety
In many countries CDs held at insured banks are protected up to a limit (e.g. FDIC insurance in the US), making them one of the safest places to earn a return. That safety is exactly why their rate, while better than checking, trails riskier investments like stocks over the long run. A CD is a place to preserve money with a modest guaranteed gain — not to grow wealth aggressively.