Know About Different Types of Certificates of Deposit

By | July 9, 2010

The Certificate of Deposit is a special time deposit for a specific period of time and for a specific rate of interest and there is penalty for premature withdrawals and you can get higher interest rate. There are different products those similar to CD.

Callable CD: It is similar to traditional CD. But here bank has the right to call the investment. The bank can buy back CD after the initial non-callable period. Premium interest rate is paid by these CDs. Banks can manage the risk through selling callable CDs.

Brokerage CD: This CD is sold by brokerage. Brokers are used as sales representatives by some banks to find investors who are willing to buy CDs from their bank. Brokered CDs pay higher interest rate than other CDs from other local banks because brokered CDs compete in a national market. Brokered CDs are more liquid than CDs of bank because those can be traded like bonds on the secondary market. Holding the CD until the maturity is only way to guarantee getting full interest and principal. These have call option often.

Bump up CDs: You can take advantage of these CDs of a growing rate environment. This bump up CDs permit the account holder during the term of the CD to increase the interest rate once. The interest rate is bumped up on CD by bank upon request to a higher rate which is being offered by the issuing bank on that certificate of deposit.

Zero coupon CDs: The word coupon refers to interest payment. These CDs are issued at a acceptable discount from the face value of the CD. This zero coupon CDs don’t pay any interest till the maturity date.