|
8 tips for buying a CD
By Laura
Bruce • Bankrate.com
 Editor's
note: In April 2006, FDIC deposit insurance coverage
on retirement accounts held at banking institutions
was raised from $100,000 to $250,000. Non-retirement
account FDIC deposit insurance coverage remains
at $100,000.
Certificates of
deposit are no longer the vanilla of the investing
world.
They can have odd lengths of maturity,
variable rates and other special features. That means it's more
important than ever to be a knowledgeable consumer.
The Securities and Exchange Commission,
which oversees the selling of CDs and other financial products,
offers the following tips for investors who are considering buying
CDs:
- Find out when the CD
matures
Many investors fail to confirm the maturity dates for their CDs
and are later shocked to learn they've tied up their money for
five, 10 or 20 years. Before buying a CD, ask to see the maturity
date in writing.
- For brokered CDs, identify
the issuer
Because FDIC insurance is limited to a total aggregate amount
of $100,000 for each depositor in each bank or thrift institution,
it's important that you know which bank or thrift issued your
CD. Find out where the deposit broker plans to deposit your money.
Ask what record-keeping procedures the deposit broker has in place
to assure your CD will have federal deposit insurance.
- Investigate any
call features
Callable CDs give the issuing bank the right to terminate the
CD after a set period, but they do not give you that same right.
If the bank calls or redeems your CD, you should receive the full
amount of your original deposit plus any unpaid accrued interest.
- Understand the difference
between call features and maturity
Don't assume that a "federally insured one-year non-callable"
CD matures in one year. If you have any doubts, ask the sales
representative at your bank or brokerage firm to explain the CD's
call features and to confirm when it matures.
- Confirm the interest rate
you'll receive and how you'll be paid
You should receive a disclosure document that tells you the interest
rate on your CD and whether the rate is fixed or variable. Be
sure to ask how often the bank pays interest -- for example, monthly
or semiannually. Confirm how you'll be paid -- for example, by
check or by an electronic transfer of funds.
- Ask whether the
interest rate ever changes
If it's a variable-rate CD, make sure you understand when and
how the rate can change.
- Research penalties for
early withdrawal
Find out how much you'll have to pay if you cash your CD before
maturity.
- Ask whether your broker
can sell your CD
Some brokered CDs are issued in the name of the deposit broker.
Sometimes, the deposit broker may advertise that the CD does not
have a prepayment penalty for early withdrawal. In that case,
the deposit broker will try to resell the CD if you want to redeem
it before maturity. If interest rates have fallen since you bought
your CD and demand is high, you may be able to sell for a profit.
But if interest rates have risen, there may be less demand for
your lower-yielding CD. That means you may have to sell the CD
at a discount and lose some of your original deposit.
For more detailed advice, visit the investor
assistance section of the SEC Web site.
-- Updated: July 13, 2004
|
