Certificate of deposit

Introduction
A certificate of deposit is a debt instrument issued by banks. A CD earns its stated interest for the stated term. Some CDs pay interests at varying frequencies (monthly, quarterly, annually, etc).

Taxation
Interest from CDs is taxable to federal income tax. Taxation at the state level vary. Some states may exempt interest from in-state banks.

Credit risk
For an amount exceeding the FDIC limit of $100,000, credit risk is a serious issue. You might consider diversifying your CDs at several banks to avoid possible loss of principal.

Early withdrawal penalty
If you need money in your CD before it matures, you may be subject to early withdrawal penalty. This penalty is deductible on a federal income tax return.