The traditional certificate of deposit remains the most popular type of CD. But according to Banrate.com a growing number of financial institutions are offering a variety of nontraditional CDs that have an element of flexibility. If you're willing to sacrifice some yield, you can find CD options that might better suit your financial needs.
Here are the more popular types of CDs.
Traditional
Deposit a fixed amount of money for a specific term and receive a predetermined interest rate. You have the option of cashing out at the end of the term, or rolling over the CD for another term. Most institutions allow you to add additional funds during the term or when rolling over. Penalties for early withdrawal can be quite stiff and will cause you to lose interest and, possibly, principal. Federal regulations stipulate only the minimum early withdrawal penalty. There is no law preventing an institution from enacting tougher penalties, but they must be disclosed when the account is opened.
Bump-up
These allow you to take advantage of a rising rate environment. Suppose you buy a two-year CD at a given rate and six months into the term the bank is offering an additional quarter-point on two-year CDs. A bump-up CD gives you the option of telling the bank you want to get the higher rate for the remainder of the term. Institutions that offer this option usually allow one bump-up per term.
The drawback is you may get a lower initial rate than on a traditional two-year CD. The longer it takes interest rates to rise, the higher they'll have to go to make up for the earlier, lower-rate portion of the term. So, be sure you have realistic expectations about the interest rate environment before buying a bump-up CD.
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