Certificates of Deposit

Certificates of Deposit

Certificates of Deposit (CDs) are simply deposited funds that earn a stated rate of interest over a specified time. Investors are, in effect, loaning their money to a bank for a fixed period in exchange for a stated interest rate, with interest paid in installments. Unless CDs are rolled over into new ones, investors also have the principal amount of their deposited funds returned at maturity. CDs earn a higher interest rate than “demand” accounts such as savings or money market accounts because investors are giving up the right to withdraw their money on demand.

CDs aren’t available only through banks

Many banks rely on firms such as Hilliard Lyons to help find investors for their CDs. Like CDs purchased at a bank, these “brokered” CDs are backed by the full faith and credit of the U.S. Government through the FDIC. Brokered CDs trade in a secondary market, which allows investors to sell their CDs at then- current market levels – which may be worth more or less than the original amount invested.

Why brokered CDs?

FDIC coverage: The basic insurance amount is $250,000 per depositor per insured bank. For details, go to FDIC.gov/deposit.

Estate feature: Allows for the full withdrawal of principal and interest (up to the FDIC cap of $250,000) if a CD’s beneficial owner dies or is adjudicated to be incompetent, even if the market value is below that amount. Few fixed-income investments offer this feature.

CD types

Fixed-Rate/Fixed-Date CDs: The most basic brokered CD has a fixed interest rate and a fixed maturity date ranging from three months to ten years.

Callable Certificates of Deposit: Issuing banks can “call,” or redeem, callable CDs after a stated period but before they mature. Callable CDs normally have higher interest rates than non-callable ones because investors are assuming the risk that the CD will be redeemed before the stated maturity date. The initial non-call, or “lockout,” period during which an issuing bank cannot call the CD is usually three months to one year.

Step-Up CDs: A step-up CDs is typically callable. It differs from a fixed-rate CD by offering a schedule of coupon rates that begin below that of a fixed-rate CD and escalate over time. The step up may be only once before maturity or as often as annually until maturity (or call by the issuing bank). Step-up CDs appeal to investors who expect interest rates to rise gradually.

Brokered CDs are backed by the full faith and credit of the U.S. Government through the Federal Deposit Insurance Corporation (FDIC).

Contact your Wealth Advisor for more details.

Securities and advisory services offered through J.J.B. Hilliard, W.L. Lyons, LLC, a registered investment advisor and broker dealer. Member NYSE, FINRA & SIPC. Investing in securities involves risk, including possible loss of principal. ©2016. All rights reserved.

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J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA, & SIPC

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