CD rates, or Certificate of Deposit rates, are the rates of interest which are offered by banks and credit unions for time deposits. CD interest rates are similar to savings accounts interest rates except that “CDs” have a specific fixed term, and usually a fixed interest rate. As with bank savings accounts, CD deposits are insured and risk-free, however the interest that is paid on CDs can only be withdrawn without penalty when the Certificate of Deposit has reached maturity.
The Best CD Rates
CD interest rates fluctuate daily, and there can be several percentage points between what two competing institutions are prepared to offer. CD rates are available for people willing to invest from $1.00 into the $millions over a period of 3 months up to 30 years, and the best CD rates in the U.S. are offered to clients who are prepared to tie up substantial amount of funds over a long period. These are known as Jumbo CDs, and for the volume of money that needs to be invested to qualify as a Jumbo CD, even a fraction of a percentage can make a lot of difference to the matured return.
CD Rates at Banks –v- CD Rates at Credit Unions
Historically, investors have chosen to invest in CDs with a bank rather than with a credit union because banks have always been perceived to be a safer institution. However, credit unions that are regulated by the National Credit Union Administration (NCUA) offer as much protection as banks regulated by the Federal Deposit Insurance Corporation (FDIC) and often offer higher CD interest rates. This is because credit unions are owned and run by their members who act for the good of the group good rather than for shareholder´s dividends.
Brokered CD Rates
Investing in a Certificate of Deposit through a broker or financial advisor can be beneficial to certain investors and provide an opportunity for smaller depositors to get better CD rates. A broker will be able to incorporate the funds of many small investors together to negotiate better CD rates with banks and credit unions, and may also provide a service where individual funds can be withdrawn prior to the maturity of the CD by selling the investor´s stake in a Certificate of Deposit on the open market.
This practice can result in a better yield for the investor if interest rates have risen since the Certificate of Deposit was initiated, but can have the reverse effect if interest rates have fallen. Furthermore, a CD broker or financial advisor will charge the investor for his services, whereas bank and credit unions offering CD rates will usually perform the transactions without cost.
CD Investment Strategy
“CD laddering” is a popular CD investment strategy which allows investors to minimize risk, create more fluidity in their investment portfolio and take advantage of the best CD rates in the U.S. from different institutions. The strategy involves investing in Certificates of Deposits at staggered intervals to avoid early withdrawal penalties should funds be required immediately, but maintaining a steady rollover of CD investment to ensure that funds are constantly earning interest for the maximum period of time.
An example of CD laddering would be to quarterly invest a sum of money in whichever 3 year term Certificates of Deposit is offering the best CD rates at the time. After three years, Certificates of Deposit would be maturing at three-monthly intervals, enabling fluidity to re-invest in the Certificate of Deposit which was then offering the best CD rate, or transferring the funds to an alternate investment.
CD Rates Summary
In summary, investors should select between bank CD rates, those offered by a credit union and what is available from a financial advisor according to their own financial circumstances and propensity to risk. Brokered CD rates may offer a higher return on investment, but if not regulated by the NCUA or FDIC may be uninsured and carry a disproportionate amount of risk in relation to the additional income investors would receive.