Understanding CD Rates

You may have noticed the sign for CD rates at your local bank, but were unsure of the investment type of how the CD rates were determined. If that is the case, you are not alone. While many investors take advantage of CD rates every year, there are just as many that are unsure of the mechanics behind this investment choice. Understanding the basics behind how the rates are determined will be the beginning steps of determining whether this is the best investment selection for you and your financial needs.

Factors Affecting CD Rates
There are two primary factors that affect CD rates, including the length of time that it will be until the CD matures and the current interest rate environment of the national economy.

In general, the longer that the maturity date is away from today, the higher the CD rate will be. The primary reasons for longer term CDs offering higher interest rates is that they are compensating you for the risk that you are taking. Longer term investments, especially when it comes to interest rates, means that there is a possibility that rates will change while an investor is in the CD. Also, investors are also making a commitment to the banking institute to keep the investment there for a longer period of time.

However, this is a major exception to this and it occurs when the yield curve becomes inverted. When this event happens, short term CD rates become higher than longer term CD rates. When this happens, it is generally a precursor to a recession and an indication that investors believe that the longer term economy will be poor.

Another factor that affects CD rates is the competition between banks. There are banks on what seems like every corner, the same as in gasoline stations. Banks must compete with each other for CD business by offering investors the most competitive CD rates. So, keep this in mind when you are searching for the most competitive CD rates available at the time you are looking to make your investment.

Other Misc Factors
Another common factor that affects CD rates is bonus programs that may be offered by financial institutions or banking institutions. In many cases, these financial institutions are looking to retain current customers as well as to upsell current customers into new products, so they offer a bonus rate for adding to a customer’s existing financial portfolio. These bonuses can mean tremendous points added onto the CD rates, ultimately helping the investor to earn additional capital growth and/or current income over the life of the CD.

In addition to these bonuses, you may find that credit unions offer higher CD rates than traditional banks. This is often due to the difference is their profitability models, giving credit unions a slight financial edge.

So, searching for the best CD rate involves more than just choosing off of a list; it is about making the most informed decision possible about both short term and long term CD rates.

Investing for CDs: What Is The Best Type Of Investment?

Investing into CDs is a popular investment decision made my millions of people per year. While many choose to invest into CDs for the simplicity, there are several tips to consider implementing to increase your opportunities for success. Before you select a CD, consider these topics and concepts:

1. CD Maturity Dates- Be sure to ask the financial institution of when the CD matures. While this would seem like a fairly straightforward thing to ask when investing into CDs, it is commonly overlooked. In fact, it is best to ask the financial institution to provide you with the maturity date in writing so that you can log it into your records when you get home.
2. Callability- When investing into CDs, be sure to ask the financial institution about any possible call features. A call feature gives the CD issuer the opportunity to call the CD prior to its maturity. The advantages to the issuer are that they can refinance debt in a low interest rate economy. The advantage to the investor is that a callable CD rate will be higher than a non-callable CD.
3. Withdrawal Penalties- When investing into a CD, one of the most important things to inquire about is what the withdrawal penalty will be if any. Withdrawal penalties often apply when the investor chooses to liquidate the CD prior to its maturity date. Be sure to ask the financial institution about the penalty associated with your investment in the event that you withdrawal the investment from the CD.
4. Variable Interest Rates- While the interest rates are often stated and static throughout the entire duration of a CD, it is possible that they will change. This is most applicable for a variable rate CD and if you are considering investing into them, be sure to ask how and why the CD rate may change.
5. Stated Interest Rates- In addition to evaluating how the variable interest rate may apply, it is important to understand the basics of all other CD rates and how they will apply to you.
6. Compare Rates- Prior to investing into a CD, be sure to compare the CD rates between investment institutions. You will often find that institutions will be fairly competitive with their CD rates in order to attract investors. Compare CD rates in local banks, financial institutions and online in order to locate the best option for your investment needs.
7. Maturity Dates- Another significant decision that needs to be addressed when selecting CDs for your investment portfolio is the length of their maturities. While the rates are often higher for the longer term CDs, it is important to make sure that you will not need access to those funds during the duration of the investment.

While these are only a few of the tips and considerations an investor should evaluate prior to making an investment, they will provide the basis for understanding CDs, CD rates and how to select the best CDs for your investment portfolio.