A certificate of deposit (CD) offers a fixed interest rate over a specific term. The return is calculated based on the principal, the interest rate, and the length of the term, with compounding frequency also playing a role. For example, a $1,000 CD with a 2% annual percentage yield (APY) held for one year would earn approximately $20 in interest.
Understanding potential returns is crucial for effective financial planning. CDs offer a predictable, low-risk way to grow savings. Historically, they have been favored for their stability and guaranteed returns, providing a safe haven during times of market volatility. This predictable growth allows individuals to incorporate the expected interest into long-term financial goals, such as retirement planning or saving for a down payment.