What exactly is a CD?

Question

Not compact disk, but a CD that you invest with in the bank.

From what others have told me, it's like a savings account with a high interest rate and you can't touch it for so many months/years. But Can anyone actually break it down for me?

Answer 1

It stands for Certificate of Deposit.  You can earn slightly more interest than a Savings Account when you buy it, but you have to commit to a fixed period of time before you get your money back.  They come in different lengths of time.  The longer you are willing to wait, the greater your interest is.

These days, the interest rates they pay are so low that it probably doesn't matter much.  

Answer 2

Yes, that is correct.

A CD is a savings account that pays you a (slightly) higher rate of interest in return for committing to keep the money in the account for a set period of time.

Answer 3

you've basically got it.  certificates of deposit are like savings accounts for fixed periods of time.  the longer the period of the CD, the higher the interest rate paid on them.  this is becauase banks like having predictable liabilities such as CDs because it makes it easier to manage interest rate risk.  for example, if someone opens up a one year CD for $1,000, they can buy one year t bills so that when your $1,000 comes due, they can use the t bill proceds to pay them and in teh meantime they make their profit on the interest rate spread b/w t bills over CDs.