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What are CDs that are Callable, Brokered, Bump-Up, Liquid, Step-Up, Step-Down, Variable-Rate, Add-On, Zero-Coupon?
A Certificate of Deposit or CD is basically a time deposit, which is a form of financial commodity offered to investors by financial institutions such as banks and credit firms. They are similar to common savings accounts since they are basically your cash deposit reserved by the financial institution and are insured. On the other hand, they are different from savings accounts since they cannot be withdrawn for specific terms (usually three months, six months or one to five years. It also comes with a fixed interest rate. The purpose of the CD is to be reserved until it reaches maturity where the money could be withdrawn including the earned interest.
In return for reserving the cash on deposit for the agreed duration, financial firms normally offer higher interest rates compared to common savings account. Fixed rates are common, but there are several institutions that offer CDs with different forms according to the rates offered.
Types of CDs That I Never Had Clue About Until Now
You can look for banks offering no withdrawal fees for CDs. Normally banks offer this privilege to their long time clients who have millions of deposits that help them gain more profit. You can inquire how to eliminate withdrawal fees using this feature.
If not needed, you should not withdraw deposits before maturity. You can also avoid paying withdrawal fees if you would consider the maturity date of your deposits. Large fees can be charged to the principal amount and the interest you have already earned for withdrawing money prior to maturity.
Purchase CDs that allow bump up rates. Aside from avoiding large withdrawal fees, you can also benefit from interest rate if you would choose this option with more flexible terms.
These CDs are similar to a conventional CD, except that the financial firm reserves the privilege to call or purchase the deposit. After the first non-callable time, the bank can call back the CD. Callable CDs are charged with a premium interest. The bank will assess if it is affordable to reinstate the deposit or leave its present status. This is comparable when you refinance your mortgage.
Not similar to common CDs, brokered CDs are purchased by a group of investors. Rather than purchasing the whole CD, every investor will own a percentage. If several investors purchase the CD, the deposit broker will not enter the investor's name but the account record would reflect that the brokerage firm is just acting as an mediator. Unless you have big bucks, you won't need to worry about these.
3. Bump Up
These CDs provide the investor the choice to increase the interest rate once during the duration of the CD. The financial firm can "bump up" the interest rate on the CD to a higher rate without changing the maturity date. These are a great idea if you feel that the interest rates will rise in the future.
These are offered on a fixed rate that allows you to withdraw a percentage of the original deposit during the term without paying early withdrawal fees. There are limitation on when you can withdraw money out, the withdrawal limit and how many times you can take out money.
5. Step Up CDs / Step-Down CDs
These are often referred as flex CD and sometimes confused with Bump Up CDs. Step Up and Step-Down CDs have a fixed interest rate for a certain period (normally one year) and then the interest rate instantly rises to a prearranged rate or is lower compared to normal CDs.
6. Variable Rate
Not similar to common CDs that are offered on a fixed rate interest, variable rate CDs are based on index and are tied to the result of the market index. The interest you accrue at maturity will depend on the growth or shortfall of the final value of the market index. These CDs can also be bonded with reference rates such as treasury certificates, prime rates or consumer price index.
7. Add On
Add On CDs can have a fixed or flexible rate wherein you can make additional investments. There can be limitation such as amount of deposits that can entered into the account. This is kind like having a savings account that you never take money out of.
8. Zero Coupon
Zero Coupon CDs are offered at a generous discount from the principal amount of the CD. Normally the terms and agreement of the maturity are longer (usually 10 to 20 years) that results in lower price. These types of CDs do not earn interest until they reach maturity.
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