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:
A Callable CD is a CD that a bank can “call” away after a designated call-protection period. What happens is that the bank gives you a premium rate while the call-protection period is still in effect, but in exchange, as soon as this period ends, the bank can then take back the premium rate and replace it with a much lower one based on the prevailing market rates at that time.
As opposed to the Callable CD, a Bump Up CD gives the depositor the chance to “bump up” or opt for a higher interest rate should there be an increase in CD rates within the lifetime of the CD. This can be done only once for the duration of the CD term.
Liquid CDs are CDs that actually allow the depositor to withdraw from his CD without being charged a penalty. Pay close attention as there are several caveats to this type of CD: 1. the minimum amount that you need to open and maintain this CD is much higher than the usual balance required; 2. the interest rate for liquid CDs are lower than traditional CD rates; and, 3. there is usually a limit to the number of times you can withdraw within the term of the CD.
Step Up or Step Down
This type of CD is known also as a Flex CD. Not to be confused with the Bump Up, the Step Up or Step Down CD usually enjoys a fixed rate for a period of time, say one year, after which the rate is automatically increased or lowered to a predetermined rate.
Brokerage CDs are those bought by the investor through a brokerage rather than from banks. The advantage of buying brokered CDs is that these usually carry higher interest rates than those directly sold at banks because brokerages can pool investments before buying a certain bank’s CD. On the downside, brokered CDs are traded on the secondary market and while you can actually have access to your cash without penalty, you could also stand to lose part of the principal for the same reason. Also, some brokerages are not FDIC insured so do your homework before buying CDs through one.
Zero-coupon CDs work in much the same way as Zero-coupon bonds. The CDs are purchased at a deep discount to par value, or the amount of the CD by the time it matures. The term zero-coupon means zero interest payments. So while this type of CD typically has higher yields, there will be no payments made for the duration of the CD term which is usually for longer periods, as the interest will be reinvested together with the principal. Even if you can afford to tie your investment for longer terms, you also need to cover the taxes that will be billed to you every year before even receiving the actual interest.
A jumbo CD is a CD in a very large denomination, usually at a minimum of $100,000 thousand. Jumbo CDs are commonly bought by large institutional investors, such as banks and pension funds, who are interested in low-risk and stable investment options. Jumbo CDs are also known as negotiable certificates of deposits, and come in bearer form. It works like a conventional certificate of deposit that locks in the principal amount for a set time frame and is payable upon maturity.
To get more detailed information on the each of these CDs and to find out which are available at this time, visit your local bank or your online bank’s website. To get the latest interest rates in the market today, check out our CD rates page.
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