Layin’ it on the Line: What are the main 6 different types of bank certificates of deposit?

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FEATURE —The average consumer may not be aware of some more attractive certificate of deposit (CD) terms as they are typically reserved for large investors and therefore offered to the bank’s wealthiest clients.

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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 CD alternatives with a financial professional is one of the essential fact-finding missions in which a conservative investor can engage.

Traditional CDs

Traditional CDs 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 CDs 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 CDs

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Market Linked CDs, also referred to as Structured CDs, 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 Federal Deposit Insurance Corporation minimizes risk to principal, and the higher interest potential dramatically reduces risk to losses due to inflation.

Deposit brokers have been selling Market Linked CDs 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 Market Linked CDs are available for a minimum deposit of $1,000, many brokers may require a higher account size.  

Bump-Up CDs

Bump-Up CDs 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 CDs are offered at higher than traditional rates to investors, with the bank retaining the option to “call” the CD after a specified period. 

Something to remember is that your interest on CDs may be taxed annually as it is earned even though you will not receive it until your maturity date.  

Copyright © Lyle Boss, all rights reserved.

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