Certificates of deposit (CDs),
also known as time deposits, pay interest for a fixed term, usually at a fixed rate. The shortest CD term is usually three months and the longest is five years. In general, the longer the term is, the higher the rate the CD pays. That's to compensate you for tying up your money for a longer period. You can always withdraw money from a CD before its maturity date, but you may forfeit some or all of the interest you expected to earn.
Many CDs require a minimum deposit, sometimes $1,000 or more, but you generally must deposit at least $100,000 to get a higher rate for the same term.
Buying CDs
Most local and national banks issue CDs, although you can often get a higher interest rate from an online, or virtual, bank. Like all bank deposits, you may also be able to buy CDs from credit unions, where they're sometimes called share certificates. Most credit union share certificates are insured and may pay more interest than bank CDs.
Some brokerage firms sell CDs as well, usually slices of a large CD the firm has purchased from a bank. You may get a higher interest rate, based on the rate the underlying jumbo CD pays. And you don't have to hold your portion of the CD to maturity as the firm can always sell it to another client at
market price,
although you may receive less — or more — than you paid for it. The tradeoff is that you may have to pay a sales charge, or commission, which you don't pay when you buy a CD from the bank.
Callable CDs
Some CDs with long terms are callable, which means the bank can call, or redeem, the CD if interest rates drop. On predetermined dates throughout the term of the CD, the bank can decide to cancel your CD and give your money back, along with the interest you've earned as of the call date.
Banks and brokerage firms must tell you when you open the CD that it's callable, and they may pay a slightly higher interest rate for the right to call it. Your risk is that you will have to reinvest your money at a lower interest rate if your CD is called.
Variable rate CDs While most CDs pay a fixed rate, some CDs pay variable rates, which means their interest rates change periodically during the term of the CD. Some variable rate CDs offer
floating rates — meaning the changing rate is reset on a set schedule against the prime rate, a Treasury rate, or some other benchmark.
Others offer a step rate that moves up or down over the life of the CD on a predetermined schedule.
