Investors searching for plus any accrued
relatively low-risk interest. But if you
investments that can redeem your CD before it
easily be converted into matures, you may have to
cash often turn to pay an "early
certificates of deposit withdrawal" penalty or
(CDs). A CD is a special forfeit a portion of the
type of deposit account interest you earned.
with a bank or thrift
institution that Although most investors
typically offers a have traditionally
higher rate of interest purchased CDs through
than a regular savings local banks, many
account. Unlike other brokerage firms and
investments, CDs feature independent salespeople
federal deposit now offer CDs. These
insurance up to individuals and entities
$100,000. Here’s how CDs – known as "deposit
work: When you purchase brokers" – can sometimes
a CD, you invest a fixed negotiate a higher rate
sum of money for fixed of interest for a CD by
period of time – six promising to bring a
months, one year, five certain amount of
years, or more – and, in deposits to the
exchange, the issuing institution. The deposit
bank pays you interest, broker can then offer
typically at regular these "brokered CDs" to
intervals. When you cash their customers. At one
in or redeem your CD, time, most CDs paid a
you receive the money fixed interest rate
you originally invested until they
reached maturity. But, you consider purchasing
like many other products a CD from your bank or
in today’s markets, CDs brokerage firm, make
have become more sure you fully
complicated. Investors understand all of its
may now choose among terms. Carefully read
variable rate CDs, the disclosure
long-term CDs, and CDs statements, including
with other special any fine print. And
features. don’t be dazzled by high
yields. Ask questions –
Some long-term, and demand answers –
high-yield CDs have before you invest. These
"call" features, meaning tips can help you assess
that the issuing bank what features make sense
may choose to terminate for you:
– or call – the CD after
only one year or some Find Out When the CD
other fixed period of Matures – As simple as
time. Only the issuing this sounds, many
bank may call a CD, not investors fail to
the investor. For confirm the maturity
example, a bank might dates for their CDs and
decide to call its are later shocked to
high-yield CDs if learn that they’ve tied
interest rates fall. But up their money for five,
if you’ve invested in a ten, or even twenty
long-term CD and years. Before you
interest rates purchase a CD, ask to
subsequently rise, see the maturity date in
you’ll be locked in at writing.
the lower rate. Before
Investigate Any Call a discount to attract a
Features – Callable CDs buyer. Few buyers would
give the issuing bank be willing to pay full
the right to price for a CD with a
terminate-or "call"-the below-market interest
CD after a set period of rate.
time. But they do not
give you that same Understand the
right. If interest rates Difference Between Call
fall, the issuing bank Features and Maturity –
might call the CD. In Don’t assume that a
that case, you should "federally insured
receive the full amount one-year non-callable"
of your original deposit CD matures in one year.
plus any unpaid accrued It doesn't. These words
interest. But you'll mean the bank cannot
have to shop for a new redeem the CD during the
one with a lower rate of first year, but they
return. Unlike the bank, have nothing to do with
you can never "call" the the CD's maturity date.
CD and get your A "one-year
principal back. So if non-callable" CD may
interest rates rise, still have a maturity
you'll be stuck in a date 15 or 20 years in
long-term CD paying the future. If you have
below-market rates. In any doubt, ask the sales
that case, if you want representative at your
to cash out, you will bank or brokerage firm
lose some of your to explain the CD’s call
principal. That's features and to confirm
because your broker will when it matures.
have to sell your CD at
For Brokered CDs, web site and read its
Identify the Issuer – publication Your Insured
Because federal deposit Deposit or call the
insurance is limited to FDIC's Consumer
a total aggregate amount Information Center at
of $100,000 for each 1-877-275-3342. The
depositor in each bank phone numbers for the
or thrift institution, hearing impaired are
it is very important 1-800-925-4618 or (202)
that you know which bank 942-3147
or thrift issued your
CD. Your broker may plan Find Out How the CD Is
to put your money in a Held – Unlike
bank or thrift where you traditional bank CDs,
already have other CDs brokered CDs are
or deposits. You risk sometimes held by a
not being fully insured group of unrelated
if the brokered CD would investors. Instead of
push your total deposits owning the entire CD,
at the institution over each investor owns a
the $100,000 insurance piece. Confirm with your
limit. (If you think broker how your CD is
that might happen, held, and be sure to ask
contact the institution for a copy of the exact
to explore potential title of the CD. If
options for remaining several investors own
fully insured, or call the CD, the deposit
the FDIC.) For more broker will probably not
information about list each person's name
federal deposit in the title. But you
insurance, visit the should make sure that
Federal Deposit the account records
Insurance Corporation’s reflect that
the broker is merely of a brokered CD, you
acting as an agent for may be able to pay an
you and the other owners early withdrawal penalty
(for example, "XYZ to the bank that issued
Brokerage as Custodian the CD to get your money
for Customers"). This back. But if you share
will ensure that your the CD with other
portion of the CD customers, your broker
qualifies for up to will have to find a
$100,000 of FDIC buyer for your portion.
coverage. If interest rates have
fallen since you
Research Any Penalties purchased your CD and
for Early Withdrawal – the bank hasn't called
Deposit brokers often it, your broker may be
tout the fact that their able to sell your
CDs have no penalty for portion for a profit.
early withdrawal. While But if interest rates
technically true, these have risen, there may be
claims can be less demand for your
misleading. Be sure to lower-yielding CD. That
find out how much you'll means you would have to
have to pay if you cash sell the CD at a
in your CD before discount and lose some
maturity and whether you of your original deposit
risk losing any portion –despite no "penalty"
of your principal. If for early withdrawal.
you are the sole owner
Thoroughly Check Out the should receive a
Broker – Deposit brokers disclosure document that
do not have to go tells you the interest
through any licensing or rate on your CD and
certification whether the rate is
procedures, and no state fixed or variable. Be
or federal agency sure to ask how often
licenses, examines, or the bank pays interest –
approves them. Since for example, monthly or
anyone can claim to be a semi-annually. And
deposit broker, you confirm how you’ll be
should always check paid – for example, by
whether your broker or check or by an
the company he or she electronic transfer of
works for has a history funds.
of complaints or fraud.
You can do this by Ask Whether the Interest
calling your state Rate Ever Changes – If
securities regulator or you’re considering
by checking with the investing in a
National Association of variable-rate CD, make
Securities Dealers' sure you understand when
"Central Registration and how the rate can
Depository" at change. Some
1-800-289-9999. variable-rate CDs
feature a "multi-step"
Confirm the Interest or "bonus rate"
Rate You’ll Receive and structure in which
How You’ll Be Paid – You interest rates increase
or decrease over time diversify their
according to a pre-set financial holdings. But
schedule. Other it might not make sense
variable-rate CDs pay for elderly investors.
interest rates that
track the performance of
a specified market
index, such as the S&P
500 or the Dow Jones
Industrial Average.
The bottom-line question
you should always ask
yourself is: Does this
investment make sense
for me? A high-yield,
long-term CD with a
maturity date of 15 to
20 years may make sense
for many younger
investors who want to
