Educate Yourself on Bank Certificate of Deposits

In the light of all the market turmoil that has ravaged countless individuals’ retirement nest eggs and other investments in the last several years, many people have begun looking for other investments that feature less risk. A person looking for the safest investment that offers higher returns should consider a certificate of deposit. About Certificates of Deposits Certificates of deposits are both safe and reliable investments for investors looking for a slightly larger rate of return than a savings account and the safety of almost no loss to principle. Over the years, the various types of CDs offered has grown considerably. This has made it a little confusing to determine which one is best for a particular individual’s scenario. Two popular types of CDs are callable and jumbo CDs. Many people like to shop for the most advantageous certificate of deposit available to them by the CD’s annual percentage yield (APY).

This is an important means of comparing what CDs actually pay investors. Annual percentage yields can be used to compare and contrast two different CDs that possess the identical maturity date but provide different means of paying their interest, quarterly versus semi-annual, for example. APY takes into account how frequently the bank pays the interest on an investor’s particular certificate of deposit. If a CD offers more often interest payments, then the return and APY is actually increased. Callable Bank Certificates of Deposit Many certificate of deposits investors will not be familiar with the concept of a callable CD. Callable certificates of deposit can literally be taken away from a CD owner following the expiration of the call protection timeframe. This would be done in advance of the CDs maturity..As an example, a five year CD that included a six month timeframe call protection could only be taken, or called, away following the conclusion of the first six months of ownership. Banks like to offer such callable certificates of deposit as the risk of a dropping interest rate is then shifted to the buyer of the CD who made the deposit in the first place. In exchange for accepting this callable nature that creates a risk of losing the interest rate, callable certificates of deposit come with slightly higher yields than identical maturity date certificates of deposit that are not callable.

This extra yield is a part of the compensation for the buyer being willing to take on the risk of losing a locked in interest rate. Banks use callable CDs to manage their exposure to interest rates when they sell such CDs. To come up with the rates that they are willing to pay a holder of a callable CD, they use complicated option pricing models. This allows them to come up with an appropriate reward to offer the buyer who helps them to balance their interest paying deposits against their loans that they make. The bank is only hedging its risk with these types of CDs. Jumbo Certificates of Deposit Like Jumbo Mortgages, Jumbo certificates of deposit typically are those of greater amounts, such as a $100,000 or higher. The advantage to jumbo certificates of deposit lies in their higher interest rates. It used to be that Jumbo CDs were not completely insured, since the FDIC only provided per account insurance of $100,000. Now, the FDIC raised insurance amounts on retirement accounts to $250,000, covering most jumbo CDs held by retirees. For those CD holders who are not using retirement funds, many banks offer smaller amount jumbo CDs. These can be as little as $25,000 or $50,000, and are called mini-jumbo CDs. Certificate of deposit provide investors with a financial product that is better than a standard savings account. Certificates of deposits offer investors with a higher rate of return for little to no additional risk.

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