4. Zero-coupon CD (certificate of deposit)
These CDs are similar to zero-coupon bonds. As with the bond, you buy the CD at a deep discount to its par value. (In other words, the amount you'll receive when the CD matures.) "Coupon" refers to a periodic interest payment. Zero-coupon means there are no interest payments.
So, you might buy a 12-year, $100,000 CD for $50,000, and you wouldn't receive any interest payments over the course of the term. You'd receive the $100,000 face value when the CD matures.
One drawback is that zero-coupon CDs are usually long-term investments, and you take on considerable interest-rate risk. If interest rates rise during the 10-year term in question, you'll be on the losing end of that deal!
Another potential problem is that you're credited with phantom income each year. No money is being put in your pocket, but you'll have to pay Uncle Sam on the earnings being accrued. In our example, you'd earn $3,000 during the first year and would owe tax on the money, though you haven't actually received it. Each year, you'll have a higher base than the year before -- and a bigger tax bill. Make sure you have the funds to cover the taxes.
5. Callable CD (certificate of deposit)
With a callable CD, the bank that issues the CD can "call" it away from you after your call-protection period expires, and before the CD matures. For instance, if you buy a five-year CD with a six-month call-protection period, it would be callable after the first six months.
Just as with the zero-coupon CD, the bank is shifting interest-rate risk on to your shoulders. If it issues the CD at 3 percent and six months later, rates drop, the bank is now paying 2 percent on five-year CDs. The bank can call, or take back, your CD and reissue it at 2 percent. You'll receive your full principal and interest earned to date. But you're now stuck reinvesting your money at lower rates.
Usually, banks pay a premium for taking on the risk that the CD may be called at. They may pay investors a quarter- or half-percent more on a callable CD than they would on a CD without the call feature.
6. Brokerage CD (certificate of deposit)
A brokerage CD is simply a certificate of deposit sold through a brokerage. Some banks use brokers as sales representatives to find investors willing to purchase the banks' CDs. A brokerage can be a convenient way to buy CDs, as you only need to have an account with the brokerage. There's no need to open accounts at a variety of banks just to get better yields. Brokered CDs often pay higher rates than CDs from your local bank because banks using brokered CDs compete in a national marketplace.
These CDs are more liquid than bank CDs because they can be traded like bonds on the secondary market, but there is no guarantee you won't take a loss. The only way to guarantee getting your full principal and interest is to hold the CD until maturity. Brokered CDs often have call options.
You may assume that brokered CDs are backed by the FDIC, but it's up to you to do your due diligence and look for that in writing on the broker's website or any printed materials you're given.
7. High-yield CD (certificate of deposit)
Banks compete for deposits by offering better-than-average rates, and Bankrate offers the best route for finding the highest rates in the nation.
Bankrate surveys local and national institutions to find banks offering the highest yields on CDs. All accounts are directly offered to the consumer by the institution.
RATE SEARCH: Check out the CD rate tables on Bankrate today.