Rising Interest Rates Make Bank Certificates of Deposit Worth Another Look

"We've seen a big increase in customers purchasing CDs in recent months," says Dai Min Barclay, first vice president of deposit product management at Washington Mutual, which offers a variety of CDs.

"Not only are interest rates higher, making it a good time for people to invest their money in a CD, but CDs are more attractive investments than ever because they have innovative features many investors aren't even aware of." Barclay also adds that CDs are generally considered a low-risk investment since an individual CD is insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).

In terms of features, Barclay points out that some banks offer CD features that will return a higher yield if interest rates go up by allowing investors an option to increase the rate once during the term, such as Washington Mutual's Bump Rate feature. Still other banks offer a limited access CD which allows investors access to their funds during the CD term, although the number of withdrawals during a monthly period is usually restricted and often times a minimum balance needs to be maintained. At some financial institutions this is known as a "liquid CD" account.

With the bump-rate feature, an investor can generally increase his or her rate one time during the term of the CD to a standard rate offered on the same CD type, balance and term. This is an attractive feature during a rising interest rate environment. While some banks require you to invest more money or extend the CD's term in order to exercise the high rate option there is no such requirement with Washington Mutual's Bump Rate feature.

Another CD feature to consider is an "add-on" feature. It allows customers to make deposits to their CDs during the CD term. When offered, the "add-on" feature is usually for CDs with terms of 12 months or less and with total deposits restricted to the original balance of the CD. While this is generally a desirable feature during a falling interest rate environment, it can also be a good savings tool in allowing consumers to add to their balances. And, it's another option that consumers should keep in mind in the long run.

Additionally, there are other innovative ways to invest with CDs, according to the Washington Mutual product manager.

"One of the strategies we recommend is what we call the 'ladder' strategy," says Barclay. "Under this scenario, an investor buys a series of CDs that mature at different times, giving access to cash at different intervals in an investor's investment horizon."

She explains that the CD ladder is a series of shorter and longer term CDs that mature at regularly spaced intervals, like rungs on a ladder. As each CD matures, the investor can access the funds or reinvest them by adding a new rung to the ladder. The rest of the money remains in longer term CDs of the ladder, typically earning higher yields.

"Typical savings accounts and short-terms CDs offer convenient access, but they often come with lower interest rates. Longer CD terms offer higher rates, but typically decrease an investor's access to their money, and are not as beneficial if rates go up. With a CD ladder, savings are divided between short-term and long-term. As each CD term comes due, it can be reinvested at the top of the ladder for a longer term, higher yielding CD, or taken as cash," Barclay notes.

While CDs are a viable option for a consumer, it's also important that customers realize there are early withdrawal penalties that apply if the principal is withdrawn for most CDs prior to maturity. Investors should carefully review their account terms for details.

"The important thing to remember is that a CD can be an important part of an investment portfolio," Barclay remarks. "In addition to their lower risk and guaranteed return, CDs have many more interesting features nowadays. CDs are indeed becoming a more flexible investment option than ever before."

Courtesy of ARA Content