Introduction

Even during difficult economic times, certificates of deposit continue to be an investment option for investors. There are various types of CDs. If you are an investor, you have to find a CD that fits your particular investment goals. If you are interested in CDs, the following are some of the options that you have.

Traditional

The way that traditional CDs work is that you deposit a specific amount of money for a specific length of time. As a result, you receive a specified rate of interest. At the end of the investment term, you could cash out. Or, if you prefer, you could simply roll over the CD for another investment term. If you wish, you could add more money during the investment term or if you decide to roll over the CD. However, you should note that there are penalties for withdrawing your money early. In fact, the penalties for withdrawing your money early can be very severe.

Bump Up

If you are interested in taking advantage of rising rates, then you might be interested in getting a bump up CD. Bump up CDs are flexible in the sense that if you buy a CD at a specific rate and then later the bank decides to offer a higher rate of interest, having a bump up CD enables you to tell the bank that you would like to get the higher interest rate for the rest of the investment term. Granted, banks that offer this option may only allow you to have one bump up per investment term.

Liquid

Sometimes investors want to withdraw money from a CD without having to face harsh financial penalties. In other words, they want their CDs to be liquid. It is true that’s sometimes you might have to keep a minimum amount of money in the account in order to be able to have a liquid CD. Also, you have to read the fine print and make sure that you understand when you can make a withdrawal. For example, you need to understand exactly how much time must elapse before you are able to make your withdrawal. Do you have to wait ten days? Or, do you have to wait much longer? Another issue that you have to consider is the issue of how many times you can make withdrawals. For example, can you make a withdrawal only one time? Or, are you able to make multiple withdrawals?

Zero Coupon

Just like there are zero coupon bonds, there are also zero coupon CDs. The way that this works is as follows. For instance, if you purchase a seven year $200,000 CD with a 5% interest rate for $100,000, there would be no interest payments for you during the seven year term. Nonetheless, you would still have to pay taxes on the interest even though you are not receiving the interest yet. Thus, it is very important that financially you are capable of paying the taxes on the interest even though you are not going to get the interest until the investment term is over. So, if you are going to purchase this type of CD, make sure that you can truly afford it and make sure that the tax payments will not put you at financial disadvantage.

Callable

Callable CDs are certificates of deposit that the bank can call away from you after the protection time period has ended. For example, if you had a one year CD with six-month call protection, it means that the bank can call the CD after six months. The reason that banks offer callable CDs is that the investor is assuming the risk. Granted, due to the fact that the investor is assuming the risk, callable CDs will tend to have higher yields than other CDs.

Brokerage

CDs sold through brokerages are known as brokerage CDs. At times, banks will use brokerages in the process of finding investors who want to buy CDs. Brokerage CDs sometimes pay higher interest rates than the CDs that you might find at the bank. The reason for this is that the banks that use brokerage CDs are in competition. These particular CDs tend to be more liquid than the CDs you would get at the bank due to the fact that these CDs can be traded on the market in the same way that bonds are traded. There are also call options on brokerage CDs. Granted, there is no assurance that you will not lose in this trading process. Holding the CD until it matures is the only way to make sure that you get your investment principal and interest.

High Yield

Some CDs are high yield CDs. These CDs do sometimes require an investor to invest a minimum amount in order to get the CD. However, these CDs offer the highest interest rates available. Typically, in order to find these, you should do an internet search because that will quickly enable you to see what rates are available. Also, the interest rates do change. For example, the highest yield CD in one month may not be the highest yield CD in the next month because some other bank may start marketing a higher yield CD. You just have to constantly check in order to see what is available.

Jumbo

Jumbo CDs are usually $100,000 or more. Jumbo CDs carry low risk and are very safe investments for individuals who want to invest a large amount of money. Jumbo CDs are similar to other certificates of deposit in the sense that the investor invests the money and then the money is held by the bank for a specific term. At the end of the term, the investor receives the principal plus interest. Of note, due to the fact that it typically takes a lot of money to invest in this, millionaires, investment funds and organizations with a lot of money tend to invest in Jumbo CDs. They do this because the jumbo CDs give them a stable source of income.

Conclusion

Investing in CDs need not be a dilemma. Remember that you have several choices of CDs to invest in. Also, you can invest for a one year term or you can invest for a term of more than one year. If you decide to invest in CDs, the main thing is to make sure that you understand the terms of the agreement. Make sure that the terms are acceptable to you and that you can afford to invest your money. If you understand the terms and if you can afford to invest, CDs can be a good investment.