Fluctuating-Rate CD’s

Certificates of Deposit with Fluctuating Rates

Many banks offer special certificates of deposit that pay variable rates of interest. Depending on the bank, they may be called “Premium Rate Certificates” or “Investment Accounts,” or some similar name. Like ordinary CD’s, they are sold for specific lengths of time and interest penalties are exacted for early redemption. However, the interest rates are not fixed but are linked throughout the life of the certificate to some other indicator of the bank’s choosing — the average yield on U.S. Treasury securities, for instance. If that yield rises, so does the interest rate on the certificate; if it falls, the rate of the CD declines as well.

A variable-rate CD is a bit riskier than an ordinary certificate in terms of interest payments, but it does offer the possibility of higher profits if interest rates rise. Like a fixed-rate CD, principal and accumulated interest are guaranteed by the FDIC or FSLIC up to $100,000, or in some states, by a state agency up to an amount determined by state law. Now that banks are permitted to offer money market savings accounts, it is likely that investor interest in fluctuating-rate CD’s will decline. For small investors, however, they offer one major advantage over money market accounts: they usually require a much smaller deposit.