If you’ve visited a bank or financial institution lately, they may have offered you the option to open a certificate of deposit or a CD. A certificate of deposit is a unique type of savings account. Basically, the account holds a fixed amount of money for a fixed period. Then, over the course of the agreed upon time, the bank pays interest on the amount in the account. Certificates of deposit are considered low-risk with moderate returns.
The most dramatic difference between a savings account and a certificate of deposit is that a savings account lets you transfer money in and out relatively freely. A certificate of deposit requires that you agree to leave a certain amount of money in it for a certain amount of time. If you need to withdraw your money early, there is usually a fairly hefty penalty. The amount in the account and the issuing institution determine the exact amount of the fine. Typically, early withdrawal penalties are equivalent to a certain amount of interest.
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