There has recently been a change happening in the financial world of certificates of deposit. Banks and lending institutions are beginning to notice a shift away from term deposits and towards liquid deposits. This means that liquid accounts, and other types of time deposits, have more money in them now than they ever have before, and they are certainly sounding like a good investment option. To stimulate and increase this interest in flexible CDs, banks are introducing rising-rate CDs.
As their name implies, rising-rate CDs are ones in which the rates will rise alongside market interest rates. Before now many investors have expressed a disapproval of long-term CDs. They are hesitant to have their money tied up for an extended amount of time, especially if interest rates are increasing higher than their current rate and they can’t do anything about it.
Rising-rate CDs remove this fear by allowing the rate on the CD to fluctuate with the interest rate levels in the marketplace. These CD types are also a way that investors and consumers can protect themselves from increasing core inflation.
Types of CDs
There are three different types of rising-rate CDs, each with slightly different terms and conditions:
- Step-Up CDs – These are a very simplistic type of CD whose rates will rise at different prearranged periods over the course of the CD term. It’s like every month or few months (depending on how long the CD term is) your rate is taking a step up toward higher interest rates. For those just getting in to rising-rate CDs, these are a great first try because they are the most straightforward.
- Bump-Up CDs – These types of CDs allow investors to raise their own rates a certain amount of times during the term of the CD. This gives the investor enormous control over his or her investment and it can be very beneficial, especially if you are closely following the market and understand the best times to bump up your rate.
- Liquid CDs – These CDs, which were mentioned earlier, allow investors the opportunity to transfer funds out of one CD and place them in another. An example would be investing in one CD, waiting until one with a higher interest rate comes along, and then shifting funds over to that one. These work well because, unlike standard CDs, there are no early withdrawal penalties. However there are certain conditions so be sure to check those out before you transfer anything.
Rising-Rate Tradeoffs
Just know that something as great as a rising-rate CD doesn’t come without a price. You can’t have rewards that good without giving something up on the front end, and there are a few factors to consider that might offset the seemingly flawless nature of the CD.
- Lower initial yields – The biggest flaw with rising-rate CDs is that their initial yield is so low. Sure this will balance out over the length of a long-term CD with rate increases, but what about those who cannot wait that long? Anyone who invests in a short-term rising-rate CD probably won’t get the same returns as they would on a standard CD. Generally speaking, Bump-Ups usually have the lowest initial yield, followed by Step-Ups, and then Liquid CDs have the best.
- Rates vary – Not only are the initial rates low, but you could end up with a rate that is lower than even the other rising-rate CDs. CD rates will vary widely depending on the bank or lending organization. So your best bet is to do some research and shopping around before you settle on anything.
- Be aware of conditions – Not only will the initial rates vary between banks, but the terms and conditions of the CD can differ also. As mentioned before, even though there aren’t early withdrawal penalties there are still other things to look out for with rising-rate CDs. For example, depending on the terms of a Liquid CD you might only be able to withdraw/transfer a couple times a year, or only up to a certain amount of money.
If you don’t like the tradeoffs that come with long-term interest rate yields than rising-rate CDs will probably not be the option for you. But they do have a lot of benefits for flexible investors. And even if you don’t like the current terms, stay plugged in to the market news. Such nontraditional CDs are becoming immensely popular, and thus their terms and conditions are changing all of the time to fit the need of the investor.