Understanding a step up CD
There are a plethora of investment options that are available, each unique in its own way. Each has various characteristics that were specifically designed to cater to an individual’s requirement. Investors have to be diligent in performing a thorough survey of various investment options available. These terms have to be read between the lines to avoid disappointments later. Certificates of deposit, money market account, savings accounts are few of the popular and commonly used investment instruments.
CDs are instruments available in most banks and financial institutions. They are schemes where money is locked for a specified period of time at a pre determined rate of interest. The returns are available on maturation. The traditional CD has a couple of disadvantages. One is inaccessibility to ones funds. The CD cannot be liquidated prior to maturation of the CD. This leaves the investor with no access to his money till the end of the term. The failure to abide by this protocol would leave the investor stifled by a hefty penalty. The other disadvantage is that of the fixed rates of interest. The rates of interest are influenced by many factors, the most important being the status of the stock market. They interest rates are constantly in a state of flux. Even if there is a rise in the interest rates, the interest rates of a traditional CD cannot increase proportionally. The remedy to this problem is answered by a step up CD.
What is a step up CD?
It is a variant of a traditional CD where the interest rates can be stepped up to the present interest rates. The terms of this CD vary for each bank. Some banks offer the option of the step up only once, while some of them offer step up’s as high as 3 times. There is an initial period of the CD where the option of the step up is unavailable. It is up to the investor to decide when he desires to exercise his ‘step up’. An investor who is well versed in predicting and interpreting the trends of the stock market would hold an advantage over the others. These CD’s are usually offered by small or start up banks to entice customers into investing in their firm. It is a stable form of investment and is FDIC approved hence the risk factor is next to negligible.
