Certificate of deposit

A certificate of deposit, or CD, is money you agree to leave with a bank or credit union for a set period, called the term, in return for a fixed interest rate. Terms commonly run from three months to five years.

If you put $1,000 into a one-year CD paying 4 percent, you have $1,040 at the end of the year, and the rate holds even if other rates fall.

Taking the money out early usually costs a penalty, often part of the interest earned. CDs at an insured bank are covered by FDIC insurance up to $250,000 per depositor, per bank, per ownership category, and credit unions have similar coverage through the NCUA. The trade-offs are cash you cannot use during the term and a fixed rate that can fall behind inflation. Interest is generally taxed as ordinary income.