Certificate of Deposit
Also known as: CD, Time deposit
A deposit with a term and a rate — the same instrument at the savings branch and on a bank funding desk.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
A certificate of deposit is a bank deposit with a contract: leave your money for a fixed term — three months, a year, five years — and the bank pays a fixed, usually higher, interest rate than a checking account. Withdraw early and you forfeit a penalty (typically some months of interest).
For savers, CDs are the safest yield upgrade there is: within deposit-insurance limits (e.g. $250k in the US, €100k in the EU), even the bank failing doesn't cost you principal. "CD ladders" — spreading money across staggered maturities — are the classic retail strategy for liquidity plus yield.
The same product has a giant institutional twin: negotiable CDs in $1M+ sizes, tradable in a secondary market, are a core bank funding tool, and money funds are their largest buyer.
- Asset class
- Money markets
- Instrument type
- Bank time deposit (often negotiable)
- Traded
- Retail (non-tradable) & wholesale (negotiable)
- Typical users
- Savers, corporates, money funds
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketmatters
- Creditdecides it
- Liquiditymatters
- Fundingbarely applies
- Operationalbarely applies
What decides it here. A deposit with a fixed term. Breaking it early is where the penalty lives, and the bank's solvency is what the rate is paying you for.
3 · IntermediateHow it works in practice
Retail mechanics worth knowing
- APY vs. rate: compounding conventions differ; compare annual percentage yield.
- Early-withdrawal penalty defines your real optionality; some "no-penalty CDs" price the option into a lower rate.
- Callable CDs: the bank may terminate early — you've sold a rate option, compensated by extra yield (and often underpaid for it).
- Brokered CDs: bought via brokerages, tradable but price-risky before maturity.
The wholesale market
Negotiable CDs (and their euro-market cousins) fund banks unsecured for 1–12 months. Rates track term money-market benchmarks; spread over OIS reflects bank credit — the same tension that once lived in LIBOR. Post-2023 (SVB), everyone relearned that uninsured deposits — including large CDs above the cap — are credit instruments that can run.
Bank funding context
Banks price CD specials to manage deposit betas (how fast funding costs track policy rates); rate-cycle turns show up first in CD advertising. Regulators watch brokered/wholesale CD reliance as a fragility marker.
4 · AdvancedPricing & valuation
Valuing a negotiable CD
A short credit-risky zero (or coupon note for longer tenors), priced off the issuing bank's short-term curve:
What the symbols mean
- Pa price, or a present value
- Fthe forward or futures price
- rthe interest rate, per year
- Sthe price of the underlying today
- nhow many periods, or how many things
- tautime remaining, in years
with \(s_{bank}\) the bank's unsecured term spread — observable across CD/CP/EURIBOR-panels and traded via the €STR-EURIBOR or SOFR-term bases. Secondary marks carry duration risk: a 6-month CD loses ~0.5% per 100bp — small, but "cash-like" investors have been surprised.
Retail CD as a bond with options
Fair value = riskless note + deposit-insurance wrapper − penalty-adjusted put you hold (early withdrawal) − call the bank may hold:
What the symbols mean
- Va value
- rthe interest rate, per year
- Tmaturity, in years
- nhow many periods, or how many things
- Pa price, or a present value
- wa weight in a portfolio
The withdrawal option is a fixed-strike Bermudan put on rates: valuable in hiking cycles (redeposit at higher rates); banks size penalties to blunt it. Callable CDs mirror callable-bond math — price them on a short-rate lattice or accept systematic underpayment.
System-level economics
Deposit insurance converts credit analysis into moral-hazard management: insured CDs price near-risk-free regardless of bank health (the S&L crisis's engine — insolvent thrifts bidding up insured CD rates). Caps, brokered-deposit rules and premium schedules are the containment machinery; the 2023 episodes revived every one of these debates.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Certificate of Deposit in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Certificate of Deposit beside any other instrument →
Where this instrument shows up elsewhere
- EasyBranch & Relationship BankingIndustryThe bank a household actually meets — and the narrow set of things the person across the desk is allowed to decide
- EasyDeposit vs. Money Market Fund vs. T-BillCompareFour ways to hold cash, each trading one specific comfort for one specific improvement
- MediumWhich Desk Trades WhatPrepEleven trading seats and six that sit next to them: what each one actually touches, the single number it lives by,…
- HardTreasury & ALMIndustryFunding the bank itself and pricing the mismatch it runs — the seat that decides what money costs everywhere else in…