What Types of Certificates of Deposit Exist?

by CD Rates on July 2, 2010 · 0 comments

in Articles

There are many different types of CDs (otherwise known as certificate of deposits) you can acquire from your local bank.  The   definitions for each CD can be confusing and this is a a guide to help define . Always keep in mind, a CD does not have to be insured from the FDIC or NCUA (credit union’s equivalent of the FDIC). Though most certificates are insured. If looking for a insured CD make sure they state it as such. To ensure the investor stays in the CD to term, typically an early withdrawal penalty exists.  Some are as short as 2 months some can CDs can have over one year penalty.  Check with your specific bank or credit union which of the below products they offer.

Fixed Rate CD or High Yield CD

This is the most common type of certificate of deposit available today, and is what most people think of when discussing investing in CDs. The rate of the CD is the same for the length of the term.

Variable Rate CD

The rate of the CD can fluctuate during the term. These CDs are often tied to U.S. Treasury Note rates. Other banks offer variable-rate CDs that track a common interest index, such as the Dow Jones Industrial Average (DJIA). There may be restrictions on how many times the interest rate can be changed, however. The advantage is if rates increase during the term of your CD, you are best not locking into a lower fixed rate CD. Conversely, if the rates decrease during the ownership you would have been better off to invest in a fixed rate CD.

Adjustable Rate CD

The rate of the CD is guaranteed for the length of the term, however the depositor can make an adjustment (usually one-time only) if rates rise.

Liquid CD or No Penalty CD

There is no penalty for early redemption of the CD. The interest rate is typically higher than the bank’s money market rate, but is usually lower than a traditional CD for the same term and minimum.

Callable CD

The institution can return the deposits plus accrued interest before the end of the term.  It is similar to a callable bond, which gives the issuer the opportunity to redeem the CD before the maturity date. The bank will return the initial investment plus any interest owed.  This type of CD will have an embedded premium in its APY to compensate the buyer for the risk of this occurring.

Bump Up CD or Jump Up CD

A bump up CD can be viewed as the opposite of the callable CD.  It allows the investor to actually move into a higher yielding CD once during the life of the CD, if the opportunity presents itself.

Step Rate CD, Step Up CD or Raise Your Rate CD

Rates increase at different times during the term. Eg, a 4-year CD may have a guaranteed rate of 4.60% during the 1st 12 months, 4.85% during the 2nd 12 months, 5.00% during the 3rd 12 months and 5.10% during the last 12 months; for a total of 5.00% APY. In other words, it would be equivalent to a 4-year CD @ 5.00%.

IRA CD

This is a CD that is available to invest for retirement purposes. The interest is accumulated tax differed for the term of the CD.

Business CD

Compared to most other CDs mentioned whereas only an individual can invest, these CDs only a legal incorporated business can own.

Brokered CD

Issued by an FDIC-insured bank but sold by a brokerage. If early withdrawal is required the brokerage may resell the CD at a profit or loss, depending on market conditions.

CDARS CD

This CD is FDIC-insured by up to $50 million. CDARS distributes the funds among its bank members so the amount invested is under the current $250,000 FDIC limit. Rates are are typically lower than for the top non-CDARS CDs. The advantage of a CDARS CD is you do not have manually distribute and monitor your investment in each bank.  One statement from one bank as if it was a single CD.

Jumbo CD

A CD that requires a minimum amount $100,000 to open. (some banks use $99,000, $95,000 or $90,000).  Individuals and institutions alike can use the CD as a low-risk way to earn interest income. The rates of jumbo CDs are typically a few basis points higher than the lower minimum amount CDs.

Foreign Currency CD

Some FDIC-insured US banks convert your US dollar deposit into one or more currencies and reconvert them back to US dollars at maturity. You may incur a profit or loss if the currencies appreciate or depreciate.

With any of these CD products, most banks offer the standard terms of 3 month, 6 month, 9 month, 1 year, 18 months, 2 years, 3 years and 5 year terms. Though these are the most popular, banks can offer any term they choose. You can search our CD rates, and find terms  from 1 month, to up to 10 years.

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