What is a certificate of deposit?

A certificate of deposit (CD) is indeed an engagement by the bank to repay received money. When an individual opens a CD, they agree to deposit a specific amount of money for a predetermined period, during which they cannot withdraw the funds without incurring penalties. In return for this commitment, the bank offers a fixed interest rate, typically higher than that of traditional savings accounts, as compensation for the use of the deposit over the term of the CD. This arrangement creates a secure investment for the individual while providing the bank with the capital it can use for lending or other purposes. The contract aspect of a CD ensures that at the end of the term, the bank is obligated to return the principal amount along with the accrued interest, making it a popular choice for individuals seeking to earn interest on their savings with a low risk of loss.