What is a certificate of deposit (CD)?

A certificate of deposit (CD) is indeed a fixed-term deposit account, which is why the identified answer is accurate. CDs are financial products offered by banks and credit unions that require you to deposit a sum of money for a specific period of time, commonly ranging from a few months to several years. During this term, the bank pays interest on the deposit at a predetermined rate, typically higher than regular savings accounts, as compensation for agreeing not to withdraw the funds until the end of the term.

The fixed-term nature of a CD means that the interest rate is established at the time of the deposit and remains constant through the entire duration of the term. This fixed interest rate provides individuals with a reliable investment option without the fluctuations associated with variable interest rate accounts. At the end of the term, the principal amount along with the interest earned is returned to the account holder.

In contrast to this, accounts with variable interest rates would not provide the same level of predictability as CDs since the interest can change, potentially resulting in lower overall earnings. An investment in stocks involves purchasing shares in a company with the potential for gains or losses based on the company's performance, which is different from the secure and fixed return associated with a CD. Finally, a short-term loan