Types of CDs
Most of us are familiar with the traditional Certificate of Deposit (CD). It is a deposit product that earns a fixed interest rate higher than the savings account for a fixed period of time. CD's are usually availed of by clients who have no immediate plans for their cash and want to enjoy a higher yield for their money in a safe and FDIC-backed investment vehicle. Other than the traditional CD however, do you know that there are also other types of CDs? These non-traditional CDs offer flexible options for depositors who may be looking to explore other CD alternatives. Here are some of the most commonly offered and used non-traditional CDs:
CD vs. Savings Account
If the economic crisis has taught us anything, it is the fact that it is unrealistic to expect the same yields we had in previous yields. Basically, expectations have to be lowered and the worst should be expected. Take the example of 401(k) plans. Previously, these investments were earning around 10% a year. Now, investors would be lucky if they don’t lose money. In the same way, investors also need to lower their expectations for certificates of deposit (CD) and savings accounts. On March 30th 2009, the average interest rate for 12 months CDs was pegged at 1.76%. This is a far cry from its peak in 2007.
How CDs Work
What is Certificate of Deposit? A Certificate of Deposit (CD) is a type of fixed-income investment product that is offered in banks and credit unions. It is a short to medium-term investment which is fully insured by the FDIC up to $250,000. When investing in a CD, clients decide to put their money in the bank for a specific period of time, and in return, the bank pays them an agreed interest rate which is typically higher than the regular savings account. Banks usually impose a certain penalty for CD withdrawals made before the maturity or the end of the term.
The List of Failed Banks Has Grown, But the Worst May Be Over
There is a lot of talk in mainstream media about failed banks, so we went directly to the source--the FDIC, to find out the full story. Here, you can see clearly that last year, 26 banks failed in total. As you can see from the chart there was very little activity in the first half of the year, then bank failures steadily increased from July through December.
Certificate of Deposit Deals
The most common promotion for CDs is a high introductory rate for new deposits. The CD usually renews at a lower rate, so it is good to go for the longest rate you are willing to lock in. Capital One offers 5.5% on a 10 year CD, if you are willing to lock up your money for so long. Capital One and Chase both offer 5% for 5 years. ING's highest rate is 3.75% for 12 and 18 month CDs, longer term CDs at ING Direct have the lower rate of 3.5%. CitiBank's special is a 6-month CDs with a 3% APY interest rate. Some banks are like Bank of America offering “No Risk CD's”. At Bank of America, the 9 month CD gets 2% interest, you have to deposit the money you withdraw into another Bank of America account, and you might be required to give 7 days notice before withdrawing the funds. Compare this to earning 1.39% on Bank of America's money market account or choosing another bank's money market account, or one of the short term, high interest rate offers.
Certificate of Deposit
Investors looking for low-risk investments that are easily convertible to cash should look into the certificate of deposit (CD). It is a special type of deposit account offered by most banks and thrift institutions around the country. Because it’s an instrument that provides stable return on your investment, CDs are considered to be more “secure” compared to stocks, mutual funds, and private equity investments. In addition, unlike other types of investment instruments, CDs have Federal Deposit Insurance worth up to $100,000.
Bank of America’s Limited Time CD Special
For a limited time, Bank of America will be offering an APY of 4.0% (4.11% when you open online) when you open a CD account. Bank of America has already reported record number of CD accounts opened in the month of July due to their special offer. To take advantage of their limited time offer, go to Bank of America.
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