2011 Rising-rate CD survey
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The pros and cons of rising-rate CDs

Rising-rate CD cons

Most rising-rate CDs offer low initial interest rates. While you may get more flexibility with rising-rate CDs, you also may give up some interest. For example, Bank of America's 18-month CD only pays 0.7 percent annual percentage yield. However, Ally's CD pays 1.49 percent. It pays to shop around.

Cummings says that rising-rate CDs do have complications. For instance, some are callable on the day they rise. "You may or may not get that (higher) rate," Cummings says. "Essentially, it's a teaser rate."

Some people give up yields, expecting higher rates down the line. "Find out if the CD is callable," Cummings says. "If so, the bank will probably call them in when rates remain flat."

Also, many rising-rate CDs sold on a secondary market by dealers such as Vanguard, Fidelity and similar firms are callable. Be careful not to overpay for this type of CD or you'll lose money if it's called. "So, either buy them at par or at a discount," says Eric Randolph, a portfolio manager at Hopwood Financial Services, Inc. in Great Falls, Va. "Don't pay a premium."

Callable CDs make it hard to determine yield to maturity, or the rate of return anticipated if it is held until its maturity date. "If it's called, that would be your risk," he says.

Rising-rate CDs differ from one another. Do your homework. Know the benchmark on which the CD is based, such as Treasury-bill interest rates. Also, you may need to notify the bank yourself when interest rates rise. Only then is your rate hiked. That's how Ally Bank's rising-rate CD works.

"Fixed income investing isn't easy anymore," Laura says. "You have to look around."

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