Certificate of Deposit
Also known as: CD, Time deposit
A deposit with a term and a rate — from the savings branch to the trillion-dollar wholesale market.
- Asset class
- Money markets
- Instrument type
- Bank time deposit (often negotiable)
- Traded
- Retail (non-tradable) & wholesale (negotiable)
- Typical users
- Savers, corporates, money funds
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 bought by money funds by the hundreds of billions.
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.
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:
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:
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.