Certificate of deposit

A certificate of deposit (CD) 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. (See FDIC: Insuring Your Deposits for details on coverage.

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.

Role in a portfolio

 * General savings vehicle. If you know the date on which you need a large amount of cash (car, college tuition, vacation, etc), you might consider opening a CD such that it will mature just before the date.
 * A part of fixed income allocation in a retirement portfolio.