A Certificate of Deposit is a low-risk investment vehicle typically sold by banks and credit unions. Traditionally, CD investors receive a fixed interest rate in exchange for committing to keep their money invested for a specified time frame. However, as investor needs have changed, banks have begun to offer variations on the traditional CD.
Fixed
Fixed certificates of deposit are typically viewed as the most traditional CD type. With a fixed CD, individuals invest a specific amount of money for a set period of time and the interest rate remains the same until the CD matures. At that time, investors receive the amount of their original investment plus interest. A fixed CD is a good choice for an investor who doesn't want to take chances with his money and wants to know exactly how much he'll have at the end of the term.
Bump-up
In contrast to a fixed CD where the interest rate remains the same for the entire term, a bump-up CD provides the opportunity for a "bump-up" to a higher interest rate one time during the term. The potential drawbacks are that bump-up CDs usually start with a lower interest rate than fixed CDs, and there is no guarantee as to when or if interest rates will rise. It is possible that the investor will be stuck with the initially low rate throughout the term.
Callable
A bank may issue a callable CD as a way to protect itself against changing economic conditions. With this product, the bank may offer an initial interest rate that is slightly higher than its fixed rate. However, it retains the right to "call" the CD, meaning it can take it back and issue one with a lower interest rate. The CD contract normally specifies a time frame in which the bank can call the product. Once this window passes, it must keep the CD at the initial interest rate for the duration.
Liquid
With most CDs, investors must agree to keep the money in the CD until its maturity date or incur substantial penalties for early withdrawals. With a liquid CD, investors have the option to withdraw money on a penalty-free basis, provided they maintain a specified minimum balance. The investor may be limited as to the number and amount of the withdrawals, and may also receive a lower interest rate than that offered by other types of CD products.
Tags: interest rate, lower interest, lower interest rate, initial interest, initial interest rate, interest rate remains
