Certificates of deposit, or CDs, are a more profitable version of the government savings bonds grandma used to buy for your birthday. A long-term vehicle, these are designed as a fixed period loan to the bank. Investors purchase them for the time specified (for example, a five or ten-year CD), and in return, the bond pays off a guaranteed rate of interest.
"[They] are a timed deposit," explained Greg McBride, chief financial analyst with Bankrate.com. "You are, as a depositor, giving a sum of money for a specific period of time, and because of that commitment, you earn a higher return than you would in an investment, where you can take the money out at any time."
For the bank, this means a pot of money the bank knows will be there, instead of the fluctuations that come with checking and savings accounts. For the investor, the upshot is a fairly nice rate of return, closely tracked by RateWatch, a premier banking data and analytics service owned by TheStreet, Inc.
In particular, the CD can play an important role for individuals who anticipate large, fixed expenses.
"If you have specific cash needs at a known point in the future," he said, "a CD gives you a risk-free return that you can align with the point in time that you need that money."
"For example, a parent who's going to be making tuition payments a couple times a year for several years, they could buy CDs that will mature at the point in time that they'll need the tuition payments and there's no risk of loss of that money," McBride added.
Secured by the FDIC, as well as the full credit of the bank, a CD is one of the safest investments money can buy, perhaps second only to a government savings bond. The result is less reward than investing in stocks, which can always take off, but commensurately less risk. They also tend to pay better than a government savings bond, as banks set competitive interest rates relative to the market.
Although like any investment, cautioned McBride, "it has a role for different investors at different times. It's not a one-size-fits-all."
Banks want their customers to buy up CDs, so they offer far better interest rates than on savings accounts (which average a weak 0.06 percent yield). The market has been soft lately though. As McBride put it, banks are currently "swimming in deposits" as investors (still somewhat nervous from the financial crisis) have been hoarding large amounts in cash and cash-like products. With more money sitting in savings accounts than they can loan off, banks don't need to court more capital, pushing down CD interest rates.
That doesn't mean there aren't some good products out there though. For those who are looking, or just comparison shopping, here is RateWatch's list of the best ten interest rates currently offered on certificates of deposit in the country.
Rates measured on a baseline 12-month CD worth $10,000.