Bump-up CDs

Bump-up CDs provide that extra layer of flexibility that allows investors to take advantage of rising interest rates. In the event that interest rates rise during the term of a bump-up CD, the investor can then make a onetime increase in their interest rate for the remaining term of the CD. Traditional CD investments do not allow these types of adjustments, and investors can miss out on the opportunities that rising interest rates can produce. In the event that interest rates were to fall shortly after the investor makes their adjustments to their CD, the investor will not lose any money. Falling interest rates do not affect bump-up CDs.

During the fall of interest rates, the investor who invested in bump-up CDs will continue to earn their specific interest rate. Bump-up CDs are a way for investors to ride out times of falling interest rates. Financial institutions that issue bump-up CDs will typically only allow their investors to bump up their interest rate only one time for each account. The only down side to bump-up CDs is their initial interest rate are lower than traditional CDs. However, the security of being able to bump up to higher rates in order to see higher returns void the downside of lower interest rates in the beginning of the CD.

Since bump-up CDs allow their rates to be adjusted within its term, they remain fairly competitive against traditional CDs. Investors who are uncertain with what path interest rates will take in the future will lean more towards bump-up CDs than traditional CDs. When the markets are showing signs of stability and interest rates can be accurately predicted over a period of time, investors will take advantage of the higher interest rates that traditional CDs usually pay out. The current state of the markets actually dictates which way most investors will go when investing in different types of CDs.

Investors can also avoid falling interest rates that checking and savings accounts will often experience. Bump-up CDs also pay more interest than traditional accounts like checking and savings. Investments like bump-up CDs should be used only as long term investments. Interest rates might not rise over short term periods that would render bump-up CDs useless. The idea is to invest over the long term to increase the investor’s chances of interest rates rising. They can then take advantage of those interest rates, whereas short term investors would have reached the maturity date of the bump-up CD before interest rates were to rise.

The majority of bump-up CDs are issued for a period of 2 years. Interest rates often see a rise in interest over this time frame. Some financial institutions will offer more than one opportunity to bump up with their CDs. These, however, pay a significantly lower amount of interest in the beginning. CDs that offer multiple opportunities to bump up interest rates should only be invested in for a long period of time. The longer the contract is with a bump-up CD, the higher the chances are that interest rates will raise.

Many investors have been given the opportunity to take advantage of rising interest rates. For example, an investor who invested in a bump-up CD for a period of 2 years and saw interest rates rise after 6 months, would then bump up their CD so that they would be earning higher interest during the remaining 18 months. Having this amount of flexibility is appealing to both experienced investors as well as new investors. Before considering investing in bump-up CDs, make sure the current economic times call for this type of investment. Investors who feel that interest rates will dramatically rise over the next 2 years are encouraged to invest in bump-up CDs.

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