Saving & investing
Certificate of deposit (CD): Definition, Formula and Example
A certificate of deposit is a time deposit that generally holds money for a specified term under stated interest and withdrawal conditions.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: CD; Time deposit.
How it works
Traditional bank CDs often offer a fixed rate, while other structures may have variable or callable features. Withdrawing early can reduce earnings or principal through a penalty. A brokered CD sold before maturity may receive a market price rather than its original deposit amount.
For a fixed rate with reinvested interest: maturity value = principal × (1 + rate per period)^periods
Check APY, interest-crediting frequency, maturity, renewal terms and withdrawal rules. Deposit-insurance eligibility and limits depend on the institution and ownership category.
$5,000 for two years at 4%, compounded annually
Assume interest remains in the CD until maturity.
- Year 1: $5,000 × 1.04 = $5,200.
- Year 2: $5,200 × 1.04 = $5,408.
Maturity value is $5,408, including $408 of interest before tax.
Fixed rate, no early withdrawal, no fees, no automatic-renewal period.
Try these example inputsA deposit product is not automatically risk-free in every form
Insurance does not cover every issuer, every amount or a loss from selling a brokered CD at a lower market price. Do not treat a hypothetical rate in the calculator as a current bank offer.
Explore with a calculator
- CD Calculator
Model maturity value, compounding and an entered interest-tax assumption.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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