Variable Rate CDs

The current state of the economy all over the world is pushing investors into unfamiliar environments with investments. However, this is a must when adjusting to the changes that the markets pose on investors. In order to be a successful investor, you must be able to change and adapt to any situation that may threaten your current investments. Variable-rate CDs are created to take advantage of certain investing situations that may make investing difficult. However, like with any other type of investment, there is still a certain amount of risks that are involved with variable-rate CDs that you should be aware of.

Variable-rate CDs have one disadvantage that can make any investor think twice before investing in them. This disadvantage isn’t uncommon though. Variable-rate CDs pay out interest rates but the disadvantage is that those interest rates can be changed at anytime before the maturity of the CD. This isn’t anything new as there are other types of CDs and mutual funds as well that can have a change in interest rates. Variable-rate CDs are not for everyone. In fact, investors who are looking for less risky investments can do so with many other options made available to them. Even though there may be risks involved with variable-rate CDs with interest rates falling, the opposite holds true as well. Investors who don’t mind taking more risks will often see the interest rates with these CDs rise.

Every bank offers variable-rate CDs differently. This is where you’ll have to do your homework before investing in these types of CDs. One format that many banks use is called the “multi-step.” Interest rates with a multi-step structured CD will change interest rates in order to adjust to predicted contract terms. The United States Treasurer offers notes that are connected to multi-step variable-rate CDs. However, this does not impact the level of security that one would see with government issued bonds. Another format banks will use when offering these types of CDs is by mirroring interest indexes of the DOW. Each type of variable-rate CD still produces a certain amount of risks.

The main purpose of taking a risk with these types of CDs is betting on the possibilities of the interest rate to go up. During our current economic times, it may be extremely difficult to predict any movement with in the markets. Unlike commodities such as precious metals, variable-rate CDs can be extremely unforgivable. For example, during the 2008 banking collapse, many investors who invested in these types of CDs a year before ended up losing a lot of money. This was due to the dramatic fall of interest rates. One interesting note to point out about this situation is that anytime interest rates fall, it is the time to buy. That may sound scary but the fact of the matter is you always want to buy low and sell high when investing.

The only way around this fact when dealing with volatile interest paying investments is to invest with fixed-rate CDs. Most fixed-rate CDs are not affected by the current turmoil that the stock markets are dealing with. Investors who invested in variable-rate CDs are most likely not to lose their principal investment. This is usually guaranteed by the issuer of the CDs. One thing to think about is when you’re investing with fixed-rate CDs and the interest rates are falling, there is no chance to get out of it. Fixed-rate CDs are locked in until the maturity of its term. Variable-rate CD’s can be taken advantage of by being able to withdraw your CDs before interest rates drop too much to help save your investments. Variable-rate CDs also allow investors to take advantage of rising interest rates while fixed-rate CDs stay at the same rate regardless of current interest rates.

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