Learning the ABCs of CDs

Not all certificates of deposit are created equal

In addition to regular CDs, whose terms are rarely longer than five years, banks may offer long-term, high-yield CDs that pay a much higher rate of interest for terms as long as 10 or 20 years. These CDs may be callable, which means that the bank has the right to terminate the CD and pay you back your principal plus the interest earned to that point. This usually happens if your CD is paying higher interest than CDs currently on the market, and it means you would have to reinvest your principal at a lower rate than your old one paid. However, unlike the bank, you don’t have the right to end a CD contract if the situation is reversed and your CD is paying less than the current market rates.

Aside from purchasing CDs directly from a bank, you can also purchase CDs from a stockbroker or other investment professional. Brokered CDs may have longer holding periods, be more complex, carry more risk, and include sales charges or fees. If the fee is modest and the CD is paying a higher rate than you could find on your own, you may come out ahead. But you should take the fee into account. Although most brokered CDs are bank products, some may be securities—and won’t be FDIC insured.

Also, if the bank issuing the CD is FDIC-insured and the CD is a bank product, remember your account value will only be insured up to $250,000, and you must be listed as the CD’s owner, otherwise if the bank fails, you could suffer a loss.

As with any investment, always ask. Don’t assume because you know what that makes me and you when you do. Up next, stocks.

Patricia Stallworth, CFP® and CDFA, is the president of PS Worth, a financial education company, the author of Minding Your Money, and the host of the Minding Your Money Minute™. Learn more by visiting MindingYourMoney.net.

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