What is variable CD?

Several products are offered by banks and other financial institutions for investing or depositing the money. One among those products include certificate of deposits shortly referred as CDs. Certificate of deposits are available in different types and with different features. Common certificate of deposits can be classified based on fixed rate of interests and variable rates of interests.

Generally certificate of deposits are invested at a standard or fixed rate of interest that is normally declared by the issuing authority during the time of investment. The maturity amount will be issued to the investor along with the interest amount fixed at the time of investment. Variable CDs features the rate of interest that keeps on changing throughout the period of deposit. Maturity amount on a variable CD will be issued with the principal amount and the interest amount being calculate at the prevailing rate of interest at the time of maturity. Different types of variable CDs are available and include the following.

Indexed variable CD is variable certificate of deposits based on the rate or index fixed by the Federal Government.  The rate of interest fixed by the Federal Government is referred as Federal Prime Rate. It means that whenever the rate of interest fluctuates with a higher or lower rate of interest, the percentage of interest earned on the interest will be determined by the fluctuated rate, either low rate of interest or a high rate of interest.  

Scheduled CD also known as non-variable CD offer the rate that is changed periodically based on the disclosed schedule.

When the indexed variable CD is issued based on a prime rate and when the prime rate is fixed at 7% and the CD is paying additional 1% along with the prime percent, the investor would receive 8% rate of interest. When the percentage of prime dropped to 6%, the rate of interest would also drop to 6%. With a scheduled or non-variable CD invested for a period of three years, the investor will receive a guaranteed pre-disclosed rate of interest.

Variable CDs allows the investors to withdraw the money before the date of maturity without any charging additional fee or penalty charges, if the rate of interest falls below a specific percentage. Most of these types of CDs are offered with FDIC insurance.

The major disadvantage of variable CD when compared with a standard CD is that, a standard CD will yield the interest at the rate of interest fixed at the time of investment irrespective of the declined rate of interest. But the same factor is again advantageous for variable CD and drawback for the standard CD when the rate of interest gets increased. Investors in Variable CDs will get back their money with the higher rate of interest and the standard CDs will receive the money along with the fixed rate of interest, which is lower than the current rate of interest at the time of maturity.

Before investment, the factors influencing the rate of interest should be examined carefully. When it seems that the rate of interest is proposed to be increased by the Federal Government, investing in a variable CD will be the ideal choice.