Certificates of Deposit (CDs)

Variable rate CDs are deposit instruments that have a fixed term but pay a variable rate of interest over the term of the instrument that can be based on an index like the prime rate. Upon maturity the principal and variable interest earned are paid to the depositor.

A jumbo certificate of deposit is a CD that has a larger minimum deposit, which is $100,000, compared to regular CDs. Traditional certificates of deposit typically have a minimum deposit of $2,500. As with traditional certificates of deposit, interest earned is paid at maturity along with return of the principal.

An add-on CD is a type of certificate deposit that allows for additional deposits to be made before maturity of the instrument. Most CDs do not allow additional deposits to be made, however, and require a lump sum deposit at the beginning of the CD term. Add-on CDs typically pay lower interest compared to traditional CDs in exchange for the flexibility that they offer.

A CD ladder is when a depositor spreads their deposits over number of certificates of deposit across multiple maturity periods, with each successively longer maturity term representing the ascending rungs of a ladder. Using this approach reduces the risk associated with interest rate fluctuations over time by allowing the depositor to continually roll over shorter term CDs and reinvest longer term CDs as they reach maturity in order to optimize yield.

Uninsured certificates of deposit are CDs that are not covered by Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).  These types of CDs pay higher interest rates to investors due to the higher risk they present.  Uninsured CDs are offered by investment firms and foreign banks that are not eligible for insurance coverage.

Brokered CDs are offered to investors through investment firms and are technically not insured by the FDIC. However, the savings held by the investment firm with a commercial bank, from which the brokered CDs are created, are insured, which offers investors a degree of protection. Brokered CDs offer investors more flexibility and higher yields vs. traditional certificates of deposit but also present higher risk.

A liquid certificate of deposit is a type of CD that allows the investor to make withdrawals before the CD reaches maturity without incurring an early withdrawal penalty.  Traditional certificates of deposit do impose early withdrawal penalties so liquid CDs offer much more flexibility, although they pay less interest in exchange for that flexibility.