An overview of certificate of deposit rates

Certificates of Deposit (CD's) have numerous interest rates depending on 1) duration of the certificate, 2) denomination of the certificate 3) type of CD and 4) issuer of the certificate. Different banks, financial institutions within various regions and countries offer interest rates that may be higher or lower than one's local financial institution.

This does not mean, CD's from non-local sources cannot be purchased. Certificates of Deposits are insured in the United States Government up to a certain amount. This article will discuss the following aspects of Certificate of Deposit interest rates.

• Differences in fixed and variable CD interest rates
• Compounding options
• Comparing CD alternatives
• Insurability of interest bearing CD's

Differences in fixed and variable CD interest rates

Interest on certificates of deposit is calculated periodically at a fixed or variable rate that is usually higher for larger deposits and longer time periods. For example, a 5 year CD for a value of $1000.00 may have an interest rate as a Jumbo $100,000.00 CD deposited for only 3 years. However, a $100,000.00 CD deposited for 5 years may have a larger interest rate than both the $1000.00, 5 year CD and the $100,000.00 3 year CD.

Different U.S. certificate of deposit rates can be compared online using tools like the bankrate.com rate comparison calculator. In the case of variable rate certificates of deposit, part or all of the interest on the certificate of deposit is linked to changes in national interest rates such as the prime rate. In such cases, when the prime rate changes, so does the interest rate on the CD. Still more variable CD's may have pre-determined changes in interest rates or market index based rate changes.

• Fixed interest rate
• Variable prime rate linked rate
• Market index based rate
• Scheduled changes in interest rate

Compounding options of CDs

Not all certificates of deposit compound the same way that means two CD's with the same deposit value, length of deposit and interest rate could yield different ending interest calculations. To illustrate further, depending on the policy of the financial institution(s) issuing the CD's, interest on the CD's can be compounded daily, monthly, quarterly, annually, or any other way that is deemed useful to the issuing institution. (monitorbankrates.com)

What this means is that the interest on the new balance with interest is calculated more frequently leading to a higher amount of accumulated interest. For example, a $10,000.00 CD compounded annually for 2 years at a rate of 5% will yield an ending balance of $11,025.00 whereas a $10,000.00 CD compounded daily for 2 years at a rate of 5% will yield an ending balance of $11,052.00. The bankrate.com website calculator also has an interest rate calculator that automatically compounds the interest on monthly compounded and other types of CD's.

Intertnational, credit union, and bank CDs

Various different financial institutions offer certificates of deposits to clients. For this reason, shopping around for the best CD rate can be beneficial as financial practices, regulations and policies of financial institutions varies form institution type and governing authority. Some of the higher international certificate of deposit annual percentage yield rates are listed below as sourced from money-rates.com, and offer double the yield of U.S. CD's and higher. A disadvantage of these CD's are that the banking regulations protecting CD holders are different from country to country, be subject to foreign currency exchange fluctuations, and minimum deposits may be required.

• South African 6 month CD 8.75%
• Brazil 3 month CD 6.40%
• New Zealand 6 month CD 6.22%
• Australian 6 month CD 5.58%

Credit Union Certificates of Deposit are insured by the National Credit Union Share Insurance Fund (NCUSIF) which is a federal insurance program that protects depositors up to an amount the same as the Federal Deposit Insurance Corporation (FDIC) Rate i.e. $100,000.00 or $250,000.00 depending on the time period in which deposits are made. U.S. Credit Union CD's aren't necessarily better than U.S. bank CD's as a 6 month rate comparison between bank CD's and Credit Union CD's indicates the bank yields aren't always necessarily lower.

Summary

Interest rate yields on Certificates of Deposit vary considerably across financial institutions, CD types, and issuing currency and/or country. Certificates of Deposit interest rates may be fixed or variable and calculation of interest may compound at fixed intervals ranging from daily to annually.

In the United States, Certificates of Deposit provide an insured way to save earning interest higher than typical savings or money market accounts. The insurance of bank and credit union issued CD's is limited to the pre-set federal insurance per account that is currently $250,000.00. However, this insured amount was scheduled to revert back to $100,000.00 of coverage starting in 2010 pending any future adjustments.

Sources:

1. http://www.bankrate.com/brm/rate/deposits_home.asp
2. http://www.fdic.gov/deposit/deposits/index.html
3. http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp
4. http://www.money-rates.com/intsavings.htm
5. http://www.ncua.gov/shareinsurance/
6. http://www.bestcashcow.com/cash_equivalents/fcuaccounts.html
7. http://financial-dictionary.thefreedictionary.com/Variable-rate+CDs
8. http://www.fdic.gov/deposit/deposits/certificate/index.html