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Certificate Deposit Rate - Understanding Certificate of Deposit Rates to Get the Most from Your Investment - Understanding the Different Types of CDs

Deciding Which Type of CD will Give you the Highest Yield

The current state of the economy has everyone scrambling to ensure their financial freedom. If you are looking for a way to secure your retirement and do not trust a savings account, look for a high interest rate CD. Certificates of Deposit are the safest ways for individuals to make short term investments with financial institutions. Before you make the decision to purchase a CD, be sure to investigate which type will give you the best return on investment.

Understanding the Different Types of CDs

Certificates of Deposit are basically short term loans to financial institutions for a fixed portion of time with high interest rates. CD bank rates are usually higher than savings accounts as an incentive for letting them borrow the money. There are several types of CDs available; however four specific types are gaining popularity due to their flexibility.

The highest bank CD rate can still be found with the traditional CD. With this Certificate of Deposit you will deposit a specific amount of money with the bank and receive either a fixed or variable rate for the time period chosen. Most traditional CDs mature in 3 months to 5 years. When they mature, you receive the total interest. At that time you have the option of cashing them out or rolling them over into another CD.

Fixed rates will ensure you have the same interest rate throughout the time of the CD, even if the national interest rate rises or falls. You are taking a chance that the interest rate raises and you will not be able to cash in on the increase. A variable rate CD will fluctuate with the rise and fall of the interest rate. The problem with this type of CD is if the national interest rate drops, you lose interest on your CD.

The brokerage CD is another popular choice. With this choice, a broker competes nationally to purchase the CD at the best rates. These CDs can also be traded like bonds; however, there are penalties and no guarantee you will not lose money in the trade.

One of the lowest bank rates CDs you can purchase is the liquid CD. With this type of CD you have the ability to withdraw money from the account prior to maturity without penalty. You do have to maintain a minimum balance in the account, and most times there are caps as to how much money you can withdraw.

When purchasing a CD, you are most likely locking in an interest rate. This means that if by chance the interest rate goes up, you will not get the increase. If this worries you, purchasing a bump-up CD will give you the option to take the higher rate during the term.

Why Choose a CD Over a Savings Account

The main reason to choose a CD over a savings account is the higher interest rate. No matter what CD you choose, the certificate deposit rate will always have a higher rate than a savings or checking account; however, you will not have the freedom to withdraw money from the account during the agreed upon period. Before purchasing a CD you need to be sure you will not need the funds for the specified time frame of the CD. CD interest rates are ever changing. Study the market and see the trends before you make a decision to buy a CD.

Additional topics

Financial Dictionary: Accounting, Business & International FinancePersonal Finance - Savings Accounts, CDs, the Stock Market, and Other Investments