it be wise to lock into a five-year certificate of deposit with
rates rising, or should I wait for a while?
Rate Trend Index comes out weekly with its survey results on where investment
professionals think interest rates are heading. It's a great way to keep up with
the trends in interest rates. You can also use Bankrate to shop for the highest
CD rates in your region or the nation with its Best
Rates search feature.
Investing in a standard five-year CD means that you've
locked in that interest rate for the next five years. You want to avoid being
long and wrong, committing to a long-term deposit only to watch interest rates
If you're uncertain about where long-term rates are
headed, there are a couple of ways to manage this risk. One way
is by investing in a bump-up CD. Another way is by building a laddered
CD portfolio. A third way is by investing in a callable CD, but
many experts will not recommend pursuing that option.
A bump-up CD allows you
to participate in higher interest rates by having the bank bump up your rate.
The typical bump-up CD only allows the depositor to do this once, and often the
window to make this decision is limited to early on in the investment term.
If you are worried about interest-rate fluctuations,
you will be much better off investing in a laddered CD portfolio than trying to
guess where interest rates are heading. See Laura Bruce's reporting on "Laddering
a CD when rates are low" for all the details.
There are many downsides to consumers
buying callable CDs. If interest rates go lower, the CD gets called
away and the investor has to reinvest in a lower interest rate environment.
Conversely, if interest rates go higher, the investor is long and
wrong, and the only compensation for that is an additional quarter-
to half-percentage point in yield from the callable CD.
So the investor loses if interest
rates go down because the CD is called away and loses if interest
rates go up because it's not. The bank is giving you a heads-I-win-tails-you-lose
proposition. Don't take it.