There are different types of CD accounts that you can open. Among these, the traditional certificate of deposit account is the most popular type. However, many financial institutions now offer different types of nontraditional CDs that are more flexible than traditional CDs. But, before you can learn about the different CD types, you must know what a CD is.
What is a CD?
A CD stands for Certificate of Deposit. It is a type of deposit account that is based on time. In simple words, the savers give the financial institution or bank their money for a specified time period and get interest payments in return.
Have a look at the various types of CD accounts.
- Traditional CD
In a traditional CD, the saver deposits a fixed money amount for a particular term period and gets a prearranged interest rate. The saver can either cash out their money when the term ends or else they can roll over their CD for a second term. Many financial institutions allow adding more funds, while rolling over the CD or during the term. In case, the saver withdraws their money, they have to pay huge penalties. Moreover, they can even lose their interest and, perhaps, principal too for early withdrawals.
- Bump-up CD
A Bump-up CD allows savers to capitalize on a rising interest rate situation. For instance, a saver purchases a CD of two years term at a specified interest rate and after 6 months, the bank comes up with an extra quarter-point on CDs of two years. At such a time, the saver can tell the bank to give them the higher interest rate for their remaining CD term. Generally, these types of CD accounts have one bump-up in one CD term.
- Liquid CD
A liquid CD allows savers to withdraw their money from their CD without any penalty. However, the saver has to keep a minimum balance in their account in order to benefit from this privilege. Liquid CDs generally have higher interest rates than the money market rate of the bank, but lower interest rates than traditional CDs of the same minimum and term.
- Zero-coupon CD
Zero-coupon types of CD accounts are those that are bought at a huge discount as compared to the par value, which is the amount that the saver gets after maturity of the CD. In this type of CD, there are no interest payments. For instance, if the saver purchases a CD of $100,000 of a 12 year term with a 6% rate for $50,000, then they would not get any interest payments during the term of 10 years. Rather the money will be reinvested and the saver will get the face value of $100,000 after the maturity of CD.
- Callable CD
In callable CDs, the bank can ‘call’ away the CD from the saver after the expiry of the call-protection period and before the maturity of CD. For example, the saver purchases a CD of 5 years with a call-protection period of 6 months, the CD can be called after the initial 6 months. This means that the risk of interest rate comes onto the shoulders of the saver, as in case the interest rates drop, then the bank can take back the CD and can reissue it at the lower rate.
- Brokerage CD
Brokerage CDs are those that are sold through brokerage. Some financial institutions or banks take the help of brokers, who work as sales representatives, in order to find investors who are willing to buy CDs from their banks. Brokered CDs offer high interest rates. However, they come with a loss risk and have call options too.
These are the 6 types of CD accounts. Now, you can make a better choice as to which CD you can go for, depending on your financial needs and preferences.