Variable Rate CDs

If you are looking for an investment that is relatively low-risk and can easily be liquidated, then you might want to look into investing in certificate of deposits (CDs). This type of investment is a deposit account with your bank or financial institution that is similar to a checking or savings account. Typically, CDs offer a higher rate of interest than a regular bank account in return for a “time deposit,” which means that you agree to tie up your money for a certain period of time. Unlike other investments, CDs are federally insured for amounts up to $100,000.

Traditionally, a bank CD paid a fixed interest rate, which remained the same until its maturity date. Today, however, there are a variety of CD products to choose from including variable rate CDs, “bump-up” rate CDs, CDs that are tied to market indexes, and CDs with special redemption features. Specialized brokerage firms, called “deposit brokers,” are also offering special rates on “brokered CDs.” These CDs can sometimes feature higher interest rates than the traditional CD which you purchase through a local bank.

Variable interest CDs offer a variety of choices to the investor and may be a good choice for you if interest rates are low and you can take advantage of a feature like a one time “bump-up” rate. Some variable rate CDs may have a “multi-step” structure or a “bonus rate,” which causes interest rates to rise and fall according to a predetermined schedule. However, variable rate CDs can be quite complicated and may not be appropriate for the novice investor.

Before your head is turned by an attractive interest rate or a high yield variable rate CD, be sure to ask your broker or bank whether the CD you are considering to purchase has a “call feature.” This means that, if your interest rate falls below a certain rate (often the market rate) your issuing bank has the option to terminate, or “call,” the CD. If you have several laddered CDs with call features, this could leave you scrambling if market rates suddenly drop and your CDs are called in all at once.

Before you consider purchasing a CD from your bank or brokerage firm, make sure you fully understand all of its terms, including when and how the rates will change, and whether the CD carries any call features. Don’t be afraid to ask questions before you invest your money. Sometimes the best CD rates on variable rate CDs are accompanied by a call feature, so read the fine print.