What is a Certificate of Deposit? 

A certificate of deposit or CD offers investors with limited resources a convenient form of investing their short term funds. A certificate of deposit can be bought through banks and thrift institutions for small amounts and specified periods. But, exactly what is a certificate of deposit?

What is a certificate of deposit?

A certificate of deposit is an IOU in that there is a promise to pay back the interest and principal at maturity to the holder of the certificate of deposit. But, a certificate of deposit is not a marketable instrument. In another word, if the holder of the certificate of deposit needs the funds or money tied up in the certificate of deposit before the maturity of the certificate of deposit, then there is no market of buyers of certificates of deposit.

What if I want to cash out my certificate of deposit before maturity?

If the certificate of deposit holder wants to cash out his or her certificate of deposit earlier than the maturity of his or her certificate of deposit, he or she would have to go back to the financial institution that issued the certificate of deposit. The holder of the certificate of deposit will have to pay an early redemption fee or redemption penalty to cash out the certificate of deposit (CD).

Example of what is a certificate of deposit & how does a certificate of deposit work

How does a certificate of deposit work can be demonstrated through the following example of certificate of deposits. For example, a certificate of deposit investor might decide to invest $500 in certificates of deposit in the bank and the bank promises to pay the investor $510 at maturity in 6 months.

Certificate of Deposit VS Bond / Is a certificate of deposit a bond?

A certificate of deposit has many properties of a bond, but a certificate of deposit is not a bond.