As a review, our guides have been the following:
- Guide I: Traditional CDs, Treasury Bonds, and Government Agency Bonds
- Guide II — Municipal Bonds and Build America
- Guide III — Callable and market-linked CDs
In case you missed the others in the series, Certificates of Deposit have been a popular investment lately, especially for institutional depositors who must hold a certain percentage of funds in government-backed products. FDIC and NCUA insured CDs are insured with full faith and credit by the US government. Through December 31, 2013, they are insured up to $250,000 for a single Tenet CD. A husband and wife using joint accounts, PODs, and/or living trusts can place a large amount of funds in a single bank and insure them. CDs have been popular with individual investors who have been looking for security. Now for the review.
Boost DC
An incremental CD has predetermined periods in which its rate increases. They are most often offered in 2-5 year terms, but I have seen them as short as 16 months. A 2-year increment could have 6-month increments. In general, the introductory rate is about 50 basis points (0.50%) below other competitive rates for that term, but the average yield when all steps are taken into account is about 25 basis points (higher ). People will often look for a longer Step-up instead of a shorter-term fixed CD. The factor to weigh is whether you think the average rate is high enough to persuade you toward the longer-term CD.
booster cd
Increase CDs are those that have the option to increase the rate during the term if the same term has higher rates. The number of hits varies, but I’ve seen it as high as three on a 5 year old CD. Unfortunately, banks often manipulate this on purpose (they say they don’t). They may offer increases on odd terms, like 17 months, and then during that term, never raise rates. So before you make a decision, ask the bank for some feedback on historical rate changes to see if they have a good track record of adjusting rates appropriately as the market changes. Banks often trade what they call raise and raise, so check the disclosures carefully before you fund the CD.
Before making any investment decision, review your portfolio and determine:
- What are your goals
- What is the purpose of these funds (emergency fund, college expenses, vacations, etc.)
- When will you potentially need them?
- What is your risk tolerance?
Once those questions are answered, choosing the right product and the right term (if applicable) will be much easier.
This article is for informational purposes only and does not serve as investment advice or a recommendation of the products described in it. The opinions contained herein are the sole opinions of the author.