What is a Variable-Rate Certificate Of Deposit
Variable-rate certificate of deposit is a certificate of deposit (CD) with a fixed term but a fluctuating interest rate. Several factors determine the rate, such as the prime rate, consumer price index, treasury bills or a market index. The basis for the amount paid out is on a percentage difference between the beginning index and the final index. The Federal Deposit Insurance Corporation (FDIC) protects variable-rate CDs and other CDs.
BREAKING DOWN Variable-Rate Certificate Of Deposit
A variable-rate certificate of deposit allows investors to put their money into a secure, protected account where it will earn a relatively modest amount of interest over the life of its term. The earned interest is usually inaccessible to the account holder until the certificate of deposit (CD) matures. Some issuers do offer a penalty-free CD which allows for the early withdrawal of funds. However, the interest rate will likely be lower than for CDs that do not provide this option.
A variable-rate CD pays an interest rate which can go up and down throughout the life of the security. The exact factors that will determine the interest rate of a variable-rate CD will vary depending on the institution. In contrast, a fixed-rate CD has a “locked in” interest rate with a basis from CD origination. The rate will remain the same throughout the entire term,
A certificate of deposit is generally considered to be one of the safer ways to invest your money, especially since the FDIC protection backs most. CDs overall are among the most reliable, low-risk investment options available. They appeal to conservative, risk-averse savers and investors. Investing in CDs is also an excellent way to diversify the risk of your portfolio. For new or cautious investors, a fixed rate CD may be the preferable place to start, but those who are comfortable increasing the risk just a little bit may want to consider a variable-rate CD.
Things to Consider with a Variable-Rate CD
When considering a CD with a variable interest rate, there are a few things you will want to keep in mind. First, remember that these CDs generally have the most significant profit potential during times of low-interest rates. If you buy a variable-rate CD when interest rates are low, there is a good chance the rate will rise over the course of the term. By contrast, if interest rates are high when the CD is opened, it’s likely they could go down soon after.
Also, consider what features are most important to you. A variable-rate CD that has a steep penalty for early withdrawal may not be as appealing to you as a fixed-rate product that has a more relaxed early-withdrawal policy.