When looking for a method to save money and earn interest, there are a number of different products available from banks and other financial institutions. One such product is certificates of deposit, or CDs, which are available both with fixed and variable rates of interest.
A certificate of deposit is a type of banking product where you pledge to leave a set amount of money on deposit with a financial institution in exchange for a higher rate of interest than what is given on savings or checking accounts. Variable CD rates feature interest rates that change throughout the term of the CD, that is, the length of time that you promised to leave the money on deposit with the institution.
Indexed variable CD rates are related to an index or rate established by the federal government, such as the Federal Prime rate, meaning that whenever this rate rises or falls, the percentage of interest you earn on your CD rises or falls with it. Scheduled or non-variable rate CDs offer rates that change periodically according to a schedule disclosed when you get the CD.
With an indexed variable CD based on prime, if prime is paying 5 percent and your CD is paying prime plus 1 percent, you would receive a 6 percent rate of interest, and if prime dropped to 4.5 percent, your interest would drop to 5.5 percent. With a non-indexed variable three-year CD, you would be guaranteed to receive a rate that changed on a pre-disclosed schedule, such as receiving 1.5 percent the first year, 2.5 percent the second year and 3.5 percent the third year.
Some indexed variable CD rates allow depositors to withdraw money early without a penalty if the interest rate falls below a certain percentage. Non-indexed variable CDs sometimes permit depositors to withdraw their money on the date a scheduled rate change takes place with no penalty.
Both types of variable CD rates are backed by the federal government, provided you open your certificate at a financial institution that is FDIC insured.
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