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What Are the Risks of Certificates of Deposit (CDs)?

Discover the key risks of certificates of deposit, including liquidity, interest rate, inflation, and opportunity costs.

Published

Video transcript

Certificates of deposit (CDs) offer low risk but come with some downsides. Limited liquidity is a primary concern; withdrawing funds before maturity typically incurs penalties. Interest rate risk is another issue; if interest rates rise, your funds might be locked in at a lower rate. Inflation risk can erode the purchasing power of your fixed return. Lastly, opportunity cost should be considered, as the money tied up in CDs could potentially earn higher returns elsewhere.

Questions and answers

  1. What happens if I withdraw from a CD early?

    Withdrawing funds from a certificate of deposit before maturity typically results in penalties, often forfeiting some or all of the earned interest.

  2. How does inflation affect CDs?

    Inflation risk can erode the real value of the fixed returns on CDs, reducing the purchasing power of your investment over time.

  3. Can interest rate changes impact my CD returns?

    Yes, if interest rates rise after you lock in a CD rate, your funds remain at the lower rate until maturity, which may result in opportunity cost.