The article concerns the following question – What are bank CD rates and why are they important? A CD is a Certificate of Deposit, it is one of the safest investments that you can make. It is normally offered by your bank and it allows you to earn a higher interest rate than you would get with a savings account with virtually no risk. The downside to this is that you don’t have the same liquidity that you would get with a savings account, you have to deposit your money for a set period of time. A CD can be a very good investment option and should form a part of most people’s portfolios.
CD rates are determined primarily by the prime interest rate, you are likely going to get a couple of percentage points above the prime rate. This will of course vary somewhat from bank to bank as there is competition for customers. You should compare the CD rate being offered to that of other investments that are available to you. Of course you have to make sure that the other investments you are comparing them to should have a similar level risk. You would want to compare them to savings bonds or GIC’s not to the stock market for example.
The other big factor that will affect CD rates is the length of time that your money will be tied up. In general they range from three months to five years in duration. If you go with a longer term you will get the higher interest rate. There are a few reasons for this, first it is more convenient for the bank to have access to your money for a longer period of time.
They make their money by loaning out the money you deposit, the longer it is deposited for the longer they can loan it out for. Of course to get people to tie up their money for a longer period they have to offer an incentive which is why interest rates are higher. CD rates are also higher for longer terms because of the chance that rates will change over the course of the deposit. If interest rates go up your deposit will no longer seem like such a good investment. In order to reduce the risk of this happening interest rates on longer investments are kept higher.
Another factor that might affect CD rates is the amount of money that you deposit. Some banks won’t make this a factor while others will. In general however the more you deposit into your CD the higher the interest rate you will get. The reason is to encourage you to deposit more money so that the bank has more to loan out. They benefit from having a larger deposit so they will offer a higher interest rate if you deposit a certain minimum amount of money. This also tends to discourage you from opening CD’s at other banks since you will get a better rate if you consolidate them all at the same bank.