How to Find the Best CD Rates

By: EconomyWatch   Date: 9 September 2010

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CD rates are the annual interest rates paid on certificates of deposit (CDs). CD rates are higher than the interest rates on savings accounts. This is because you would have complete access to the money in your savings account, while your money would be 'locked' for a specified period in certificates of deposit. In exchange for this, you can enjoy high interestrates.

Factors Affecting CD Rates

The primary factors that affect CD rates are the tenure of deposit and the prevailing economic situation. The longer the tenure of deposit, the higher will be the interest rate. With longer-term CDs, customers face inflation risk, which can erode theinvestment’s purchasing power. Meanwhile, prevailing rates might rise above the interest payable on existing CDs, resulting in a profit opportunity being lost. The higher interest rate is thus an effort to mitigate inflation and fixed-rate risks. Jumbo CDs issued by commercial banks attract the highest bank CD rates.

Moreover, the prevailing economic condition can affect interest rates. If the yield curve becomes inverted owing to a recessive economy, shorter-term CD rates will become higher than long-term CD rates. The uncertainty surrounding the future economic condition can shake investor confidence, leading to a cut in the long-term CD rates.

Another critical factor that can impact CD rates is competition in the banking sector. With banks mushrooming everywhere, customers are in high demand and lured with attractive offers. Thus, banks offer competitive CD rates to attract new CD customersand retain the existing creditworthy clients.

How to Calculate Yield Based on CD Rates?

CD rates can be compounded annually with the principal amount or paid separately. To calculate the yield based on a compounded rate of interest, one can use the following formula:

A = p [(1 + r/k)^kt]

where,

A = final amount of money, i.e. principal + interest

p = the principal amount deposited in the CD

r = rate of interest per annum

k = frequency of compounding in a year, such as monthly, quarterly or yearly

t = tenure of the CD in terms of year.

How to Get the Best CD Rates?

Here are some tips to get the best CD rates:

  • Acquire information on the national average CD rate for a specific period. Always buy a CD that is offering a higher interest rate than the national average.

  • Compare CD rates from different financial institutions, such as banks and thrift institutions. Opt for one that is offering ahigher rate.

  • Many banks offer discounted CD rates for special holding periods. For example, a bank may offer higher interest on a ten-month CD than it does on a 12-month CD.

  • Opt for longer-term CDs to maximize earnings.

CDs offer insured and guaranteed returns on the deposited money. However, consider your current financial requirements and investment targets before deciding on the term of the CD.


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