In finance, CDs can refer to two different things: certificates of deposit and credit default swaps.
Certificates of Deposit (CDs) are a type of savings account offered by banks and credit unions. When you open a CD, you agree to keep your money in the account for a specified length of time, and in return, you earn a fixed interest rate that is generally higher than the rates paid by many bank accounts. Withdrawing money early from a CD means paying a penalty fee to the bank. CDs are considered low-risk because they are FDIC-insured up to $250,000.
When shopping for a CD, you should compare different offers by looking at the term (the time you agree to leave your money in the CD), the interest rate you earn, and the amount of the penalty for withdrawing money before the end of the term.
Credit Default Swaps (CDSs) are a type of financial derivative that allows an investor to swap or offset their credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse them if the borrower defaults. Most CDS contracts are maintained via an ongoing premium payment similar to the regular premiums due on an insurance policy. A lender who is worried about a borrower defaulting on a loan often uses a CDS to offset or swap that risk. The CDS market represents more than $10 trillion in gross notional exposure.
