CD Account Rates, Determining Factors

By: EconomyWatch Content Team   Date: 8 March 2010

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EconomyWatch Content Team

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Most people understand that CD account rates will vary but not everyone understands the factors involved that help set the rate.  If you are looking for a low risk way to invest money, we recommend you consider certificates of deposit.  This type of savings account has been popular for a long time and today, remains an excellent and safe way to earn money on your money.  However, before you do anything, it would be to your advantage to learn the various factors that surround CD account rates.

Remember, by leaving your money in a CD for a determined amount of time, once the certificate of deposit matures on the final date, the bank would pay money toward the initial investment amount.  The amount of money earned above the initial investment would depend on the CD account rates being paid and considering that different banks offer different rates, it is essential to do research to find those with the highest paying interest available.

CD Term

One of the factors surrounding CD account rates is the term.  Generally, the longer the term for a certificate of deposit the higher the interest rate offered.  The reason for this is that when a CD investment is left alone until the date of maturity, the less liquid the investment.  However, if interest rates were to decline, there would be a slight risk of not making what you expected on the CD.  Even so, the initial investment would remain untouched as long as the bank has FDIC insurance.

Bank Competition

Another factor surrounding CD account rates is the bank itself.  Keep in mind that financial institutions are competing for your business so the better interest rate offered the more likely you would be to choose that bank.  In addition to banks competing locally, online banks are also competing.  For this reason, you want to spend time looking at the various CD account rates that banks offer, using this as one of your determining factors.

Economy

The current economy is also a factor surround CD account rates.  The way certificates of deposit work is that the money invested would then be invested by the bank in investments that yield more than they offer or the money is used as loans to borrowers but at a higher interest rate than the bank pays on the CD. 

Another possibility is that the bank would borrow from the Federal Reserve Bank but in this case, since funds rates are typically low, the bank making the investment would likely choose a less expensive funding source.  The result is that when the economy is struggling, CD account rates would be lower than in a sound economy.

The key to finding high CD account rates is to have a good strategy.  By remembering the different factors that define current rates offered, you would know what to look for, as well as the right decisions to make.  It may take a little time to find a bank that is going to offer enough return on your investment to make it worthwhile but many opportunities exist.
 


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