Certificate of Deposit accounts are the ones which would be locked in a bank for certain period of time
. From account holders point of view, he can think that his account is locked for the period. After the maturity period the interest accumulates and credited. There can be monthly credits as well. But as said almost all external fund transactions would be locked.
Annual Percentage Yield differs greatly for different maturity period. Generally the range is from 3 months to 60 months (5 years). Higher the term, higher would be the APY. During this term, bank would invest the money in areas like mutual funds and markets. But generally banks would invest savings account money in risk free areas. Though some banks may invest aggressively in risky areas, FDIC insurance can assure that the money is safe.
There are several advantages associated with these accounts. This could be treated as a risk free investment on par with mutual funds investment. FDIC insurance further convinces that the money is very safe. Any surplus amount which would otherwise remain idle can be invested in these accounts. Banks which are transparent about their investments should be preferred over banks which would conceal the investments from account holders.
The prime drawback associated with these accounts is that the money in this savings is locked until maturity. They cannot be compared to transaction rich accounts. Also, interest rates though are on the higher side, they cannot be compared with aggressive investments like stock investments and commodities. Though these types of accounts have considerable amount of risk involved the returns they offer is far too high when compared with CD accounts.