CDs

CDs are an excellent way to invest for the short term and midterm, but there are several things to consider. Fortunately there is a lot of information available both online and from financial institutions that explains the most important aspects of investing in CDs.
There are several factors relating to CDs that investors need to know in order to understand the market.

Financial institutions are allowed to close a CD before it fully matures.

The financial institution is allowed to delay withdrawals in the event that investors flood the bank with withdrawal reqests, known as a run. Rumors of a bank’s failure can often lead to this.

The CD rates and how interest will be paid will be stated clearly in the terms and conditions.

The financial institution is not required to give notice that the CD has reached maturity. If the investor doesn’t give instructions otherwise, the CD will be rolled over into another CD account

Early withdrawal penalties will be spelled out in the terms and conditions.

There are several different types of CDs. A few of the most common are callable, brokered, liquid and bump up CDs.

Callable CDs

Banks issue callable CDs and reserve the right to repurchase the investment. At a specifically stated date, the bank will make the decision as to whether the CD will continue or if it will be bought back. For example, a five year CD might have a six month call protection clause. After six months, the bank can recall the CD. Since they are less stable, they generally pay a higher interest rate than those without call provisions.

Brokered CDs

Brokerage firms, financial consultants and advisors offer these CDs. They are generally held by a particular group of investors, each owning a piece of the action. The investors agree to keep money in the CD for a specific period of time and the institution will pay a specified rate of interest in return

Liquid CDs

Liquid CDs allow investors to withdraw a portion of the initial investment without penalty. Limits on these withdrawals are specified in the terms. The number of transactions is also usually limited. Because of this liquidity, these are among the lowest paying CDs.

Bump Up CDs

A bump up CD is one that allows the institution to increase the interest rate during the life of the CD. Investors who believe interest rates are likely to go up in the near future often choose this type of CD. These CDs also mature fairly quickly.

This is not a full list of the CD types available. No one CD is best in all situations and often a mix of the different types is the best strategy to hedge against market forces and fluctuations. Knowledge of the pros and cons of the different types of CDs can help you tailor a CD portfolio that will offer the highest rates of returns with the most flexibility and least risk.