A certificate of deposit (CD) is a bank investment product that offers a guaranteed return of principal and interest. With many investors taking big hits in the market, CDs are increasingly popular places for investors to stash their cash while still earning interest. Like other banking products, CDs are insured by the FDIC for up to $250,000 for single accounts and $500,000 for joint accounts (until December 31,2009). As such, investors are safe from losses in the event of a bank failure.

CDs are considered time deposits because they are bought for a specific term during which the money cannot be withdrawn. Terms range from one month to five years. When the CD matures at the end of the term, the investor can withdraw the principal plus interest or choose to roll the funds over into another CD. For example, if you invest $10,000 in a 24-month CD with an interest rate of 1.584%, (the current national average for a 24-month CD according to BankingMyWay.com at the end of the term you could withdraw or roll over $10,321.66. If you decide to cash the CD out early, the interest earnings will usually be subject to penalties.

Penalties for early CD withdrawals are usually stiff. A minimum of seven days of interest must be charged for early withdrawal according to federal law, but most banks charge more. Most banks base early withdrawal penalties on the term of the loan. For example, a 1-month CD often carries an all-interest penalty. CDs up to 18 months often have 3-month interest penalties. CDs with terms over 18 months may lose six or more months worth of interest for early withdrawal. Some banks do not spell out early withdrawal penalties up front. Instead they base them on a formula that factors in term and current market rate at the time of the withdrawal.

Because access is so restricted, CDs can pay higher yields than most other banking products. Higher deposits generally have higher yields. Banks use the money they bring in through CDs to make other investments. Early withdrawal penalties provide banks with more certainty about how much money will remain invested with them. As a result, banks can make longer-term, higher-yield investments as well.

There are several types of CDs you can choose from. The conventional CD is as described, a fixed-rate, fixed-term investment with early withdrawal penalties. Other CD types include:

No-penalty CDs -- liquid CDs, these CDs you do not incur penalties for early withdrawals. These CDs usually have lower interest rates than conventional CDs, however.

Bump Up CDs--Sometimes called flex CDs, these CDs allow you to get a higher interest rate if rates go up during your term. Your rate can usually only adjust once during the term, however.

Brokered CDs -- These CDs are available through a deposit broker. They usually have higher rates because brokers shop nationwide and combine deposits.

Callable CDs—Banks can recall these CDs if interest rates fall significantly. Your money plus interest earned to date is returned. These usually have higher interest rates than conventional CDs.

Shop for CD offers in your area using the CD Rate Search tool from BankingMyWay.com.

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