How Are Interest Rates Calculated On Certificates Of Deposit (CDs)?

A certificate of deposit, also known as a CD, is basically a type of time deposit, a financial product generally provided to customers by banks, credit unions and other types of financial institutions. CDs resemble savings accounts by the fact that they too are insured and hence almost without risk. However, they differ from savings account by the fact that the certificate of deposit has a certain, predetermined time period, and it also has a predetermined interest rate. The purpose of the certificate of deposit is that it be held until the time it matures, at which time the money can be removed along with the accumulated interest.

There are some generally accepted rules for interest rates for CDs such as the following:

The bigger the principal amount, the higher the interest rate
The longer the time period, the higher the interest rate
The smaller the bank, the higher the interest rate