Certificates of deposits are as safe as a savings account because they are insured by the Federal Deposit Insurance Corp., which means there is virtually no risk that you will lose your investment. Whether you can get a decent interest rate on it, though -- even one that can keep up with inflation -- is another question. Shopping around for a CD is easy. While you might start by inquiring about CD rates at your bank, the Internet makes shopping for the best CD rates easy. However, the rate you receive on a CD depends on several factors.
CD rates are a function of interest rates that are offered throughout the economy. In a high interest rate environment, banks offer high rates on CDs; the opposite is true in a low rate environment. For example, the yield on one-year CDs was almost 12 percent in January 1984. By 1990, the yield on the one-year CD fell to 8 percent. Six years later, CD rates dropped to about 5 percent. By 2012, a one-year CD earned less than 1 percent interest.
Interest rates fluctuate daily to reflect the demand and supply for money and other economic factors. The Federal Reserve, the central bank for the United States, influences interest rates through monetary policy. Institutions follow the Fed's actions closely. If the Fed raises short-term interest rates, the rates on CDs rise accordingly; the opposite is true when the Fed lowers rates. This explains why the rates on CDs are similar across many financial institutions. While CD rates go up and down with interest rates, buying a CD locks you in at the set rate for the term of your certificate. This means that if interest rates go up, you are stuck with the terms of the CD unless you purchase a new CD at the higher rate.
With the click of your mouse, you can shop around for CD rates in your area online. With a quick visit to a bank, you can get answers to your questions regarding rates and terms. It's good to shop around because smaller institutions tend to offer higher interest rates on CDs than larger institutions. In addition, institutions that are not FDIC insured generally pay higher rates on CDs. They offer higher rates because you are putting your money at risk in a non-insured financial institution where you could lose your investment if the institution fails.
Jumbo CD Rates
In some cases, a bank may offer an above-average interest rate compared to the market. For example, it is not uncommon for a bank to offer above-average CD rates to attract deposits as a promotion, particularly if the bank is new to the area or is a new bank altogether. A jumbo CD is one that requires an investment of $100,000 or more to pay you an above-average rate. However, if you have that kind of money, an alternative investment such as stocks or bonds might be a better investment. The only caveat is that stocks and bonds are not as safe as CDs even though you stand a chance of earning a much higher rate of return on your money.