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Layin’ It on the Line: Different types of bank certificates of deposit to know

By Lyle Boss - Special to the Standard-Examiner | Jan 26, 2022

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Lyle Boss

“Certificates of deposit are offered by banks over a specified period with fixed or variable interest rates. But you need to know how the game is played!” — Lyle Boss

The average consumer may not be aware of some more attractive CD terms as they are typically reserved for large investors and therefore offered to the bank’s wealthiest clients. Some types of CDs are not provided directly by an issuing bank but are made available through financial professionals licensed to sell the specific CD instrument in question. That is why investigating the certificate of deposit alternatives with a financial professional is one of the essential fact-finding missions in which a conservative investor can engage.

Traditional CDs: Traditional certificates of deposit are sold directly by banks to the general public. The purchaser agrees to hold their funds for a specified period with the bank to attain a fixed return on their investment when the period ends, usually referred to as the certificate’s “maturity date.” If the depositor wants to withdraw funds before the maturity date, penalties are generally applied, and this is pretty much the only way you can lose principal with a traditional CD investment.

Brokered CDs: Brokered certificates of deposit are sold through securities broker-dealers and deposit brokers rather than directly through the issuing bank. Brokers purchase the CD from the issuing bank on the investor’s behalf.

Market-linked or structured CDs: Market-linked certificates of deposit, or MLCDs, also referred to as structured certificates of deposit, are a brokered type of CD offering the safety of FDIC insurance with more attractive interest rates than traditional CDs. They usually pay both a guaranteed interest rate and a variable interest rate, which is tied to a market vehicle such as stocks, bonds, commodities or indices. Conservative investors find these desirable investments as the FDIC insurance minimizes risk to principal, and the higher interest potential dramatically reduces risk to losses due to inflation.

Deposit brokers have been selling MLCDs in the United States since Chase Bank introduced them in 1987, but they were designed for wealthier investors and were out of reach to average investors. While today’s MLCDs are available for a minimum deposit of $1,000, many brokers may require a higher account size.

Bump-up CDs: Bump-up certificates of deposit offer a lower initial interest rate than traditional CDs to investors but provide them with a one time option to “bump up” their rate if interest rates rise during the CD term.

Step-rate CDs: Step-rate certificates of deposit are designed to “step” up or down to a predetermined rate at a certain point in the term of the CD based on specific circumstances.

Callable CDs: Callable certificates of deposit are offered at higher than traditional rates to investors with the bank retaining the option to “call” the CD after a specified period.

And beware: Your interest may be taxed annually as it is earned even though you will not receive it until your maturity date.

Lyle Boss is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.

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