What do Certificates of Deposit (CDs) represent in banking?

Certificates of Deposit (CDs) are classified as time deposits because they require the account holder to deposit money for a fixed period of time, ranging from a few months to several years. During this term, the bank pays a fixed interest rate that is typically higher than that of regular savings accounts, reflecting the commitment of the customer not to withdraw the funds until the CD matures.

This structure provides certainty for both the bank and the customer: the bank can use the funds for lending or investment for the time specified, and the customer receives a promised return on the savings. The set maturity date is a key defining feature of time deposits, distinguishing them from other bank products that allow for more immediate access to funds.

In contrast, emergency funds represent readily available savings, demand deposits refer to funds that can be withdrawn on demand (like checking accounts), and investment accounts may include a variety of instruments not bound by a fixed term. Thus, identifying CDs as time deposits is foundational for understanding their function in personal finance and banking operations.