Variable-Rate Certificate of Deposit
Candlefocus EditorThe interest rate of a variable-rate CD works differently than a traditional, fixed-rate CD. Instead of a fixed rate for the term the CD is held, the interest rate may fluctuate from time to time according to changes to underlying factors, such as changes in the prime rate, the CPI, or market indexes. As a result, the average yield for the term of the CD may be higher or lower than the original rate offered when the CD was purchased.
Variable-rate CDs may be more attractive during times of low interest rates, since the returns can potentially be higher than with a fixed-rate CD. It is important to remember, however, that prolonged low interest rates can also adversely affect the returns of a variable-rate CD.
As with other CDs, a penalty is usually associated with withdrawing funds early from a variable-rate CD. These penalties can vary between the financial institution offering the CD, but generally involve a percentage of the interest earned or the principal invested, or a combination of both.
When considering the purchase of a variable-rate CD for investment, it is important for investors to closely review the specific terms and conditions of the CD. Additionally, investors should determine the risk associated with investing in a variable-rate CD, and avoid purchasing one if the potential reward does not outweigh the potential risk.