Certificates of Deposit (CD) are also known as time deposits. So, when we make a CD with a bank, we are essentially putting money in the bank for a certain period of time on which we can't take out the money. The bank pays an interest on it.
After maturity, we can collect the principal and interest earned or we can make another CD with the new money. BUT, if we decide to cash the CD BEFORE THE MATURITY DATE, we have to forgo some money from the interest we will earn. So basically we have to pay a penalty of NOT KEEPING OUR PROMISE of keeping the money with the bank for that set amount of time.
