The ABCs of CDs

The ABC's of CDS (Certificates of Deposit) K4796 What are CDs? CDs - Certificates of Deposit - are fixed-income investments issued by banks and other lenders, and insured by the FDIC up to $100,000 ($250,000 on retirement accounts). Here's how it works: You give the bank a fixed amount of money for a fixed term. The bank gives you the principal, plus a fixed amount of interest. When the term expires, you receive your principal and accumulated interest. Unfortunately, you are responsible for paying taxes on the phantom interest you earn. traditional bump-up liquid zero-coupon callable CD CD CD CD CD Once you decide to purchase a CD, you have to decide what type of CD to buy. Afraid of rising interest Afraid of penalties? Consider a liguid CD. You can withdraw money Want to avoid irksome Not afraid of interest rate d of risk? Then think callable A traditional CD. The rates? A bump-up CD interest payments? Think about old standby - you CD. The bank can repur- allows you a one-time option to bump up your interest rate. Let's say you abour zero-coupon CDs. You buy the CD at a choose a fixed amount without a penalty. Your interest rate will be lower chase its CD from of money that is invested for a preset term and interest rate. deep discount to par value (the amount you'll get when the CD matures). The word "coupon" refers to an interest payment. Zero-coupon means no interest payments. You do not receive any interest until the bond matures. after a stated interval. this privilege. Federal law purchased a 3-year CD. A year into your CD, interest rates rise! With your bump-up CD, you can Banks usually call CDs in odany can when interest rates drop. This There are several l mandates that CD money stay in the account CDs you can choose from: Tor seven days prior to withdrawal without penalty. This way the bank reissue the bonds it calls in at a bump up that interest rate. The downside to this type of CD is that your initial lower interest rate. The Banks are allowed to set upside is that you get a higher interest rate because of the call option embedded in your CD. the penalty-free withdrawal interest rate will be lower period for any time after than that of a traditional that. 3-year CD. The Pros and Cons of investing in a CD (as opposed to savings, stocks, money-market accounts, 4Õ1ks, etc.) CONS PROS Lower risk, therefore lower yield. While you can be as- sured that your initial investment is safe, you don't have the possibility of earning greater amounts of money that you may earn with higher risk investments. Your money is in a safe place with higher interest than it would get in a savings account. While there isn't much of a chance of making big money, it is a safe investment. The CD is susceptible to market fluctuations. While the economy is doing well, interest rates will be higher. The FDIC (Federal Insurance Deposit Corporation) insures CDs up to $100,000 so you can be assured that you will get the money back when the CD There is a penalty charged (unless you have a brokered CD) if removing the money earlier than the term of the CD. matures. Despite CDs relatively high, and safe returns, inflation can still have an affect. Do your research and protect your purchasing power. The rate of return isn't bad. 4.65% APY, which was the highest CD rate as of this writing, is pretty good. It probably beats your bank's savings ac- With CDs, you're locked into a set period of time. The shortest CDs are usually 6 months and offer the least amount of interest. The sweet spot right now appears to be the 12 and 18 month CDs, though if you're willing to lock it in for 60 months, you would be handsomely rewarded. count rate There are several different types of CDs available that offer various perks and assurances. CD Rates offered at Various Lenders CD RATE MIN. BALANCE EverBank 0.75% to 3.39% $1,500 ONLINE BANK 3 to 60 months Ally Bank 0.84% to 2.99% $0 E-Trade 1.0% to 1.40% $1,000 6 to 60 months FNBO Direct 1.00% to 2.51% $500 ING Direct 0.75% to 1.25% $0 Aurora Bank FSB 1.52% to 3.10% $1,000 HSBC Direct HSBC Direct 1.0% to 1.70% $10 Discover Bank 1.95% $2,500 Sallie Mae 1.50% to 3.00% $0 Discover Bank Charles Schwab Fidelity 0.75% $1000 Bank of America Bank of America 1.40% $5,000.00 Sallie Mae CD TERMS Fidelity Charles Schwab- $0 1.90% Sources: thedigeratilife.com, bargaineering.com, howtodothings.com 0O ING Direct FNBO Direct Aurora Bank FSB 18 to 30 TRADITIONAL uou Su T 09 01ZT| E-Trade 6 to 48 months Ally Bank EverBank ONLINE BANK months 12 months months T. LENDERS