What they are and how they work
Bank pays a fixed amount of interest for a fixed amount of money during a fixed amount of time.
- No risk
Offers higher interest rates than savings accounts.
Restricted access to your money
Withdrawal penalty if cashed before expiration date (penalty might be higher than the interest earned)
Types of certificates of deposit
1. Rising-rate CDs with higher rates at various intervals, such as every six months.
2. Stock-indexed CDs with earnings based on the stock market.
3. Callable CDs with higher rates and long-term maturities, as high as 10–15 years. However, the bank may “call” the account after a stipulated period, such as one or two years, if interest rates drop.
4. Global CDs combine higher interest with a hedge on future changes in the dollar compared to other currencies.
5. Promotional CDs attempt to attract savers with gifts or special rates.