Certificate of deposit
Encyclopedia
A certificate of Deposit (CD) is a time deposit
, a financial product commonly offered to consumers in the United States by banks, thrift institutions
, and credit union
s.
CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank". CDs are insured by the Federal Deposit Insurance Corporation
(FDIC) for banks and by the National Credit Union Administration
(NCUA) for credit unions. They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate
. It is intended that the CD be held until maturity
, at which time the money may be withdrawn together with the accrued interest.
In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve
situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid-2004, interest rates were expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock market
, the bond market
, or other indices are introduced.
A few general guidelines for interest rates are:
The consumer who opens a CD may receive a passbook
or paper certificate. It is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.
Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new CD). Generally, a "window" is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened not to roll over the CD).
to state at the time of account opening the penalty for early withdrawal. It has been generally accepted that these penalties cannot be revised by the depository prior to maturity. However, there have been a couple of cases recently where a credit union modified their early withdrawal penalty and made it retroactive on existing accounts. The second occurrence happened when Main Street Bank of Texas closed a group of CDs early with out full payment of interest. The bank claimed the disclosures allowed them to do so.
The penalty for early withdrawal is the deterrent to allowing depositors to take advantage of subsequent enhanced investment opportunities during the term of the CD. In rising interest rate environments the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. The added interest from the new higher yielding CD may more than offset the cost of the early withdrawal penalty.
is the "CD ladder" strategy. In the ladder strategies, the investor distributes the deposits over a period of several years with the goal of having all one's money deposited at the longest term (and therefore the higher rate), but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.
For example, an investor beginning a three-year ladder strategy would start by depositing equal amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From this point on, a CD will reach maturity every year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor would have all money deposited at a three-year rate, yet have one-third of the deposits mature every year (which can then be reinvested, augmented, or withdrawn).
The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank, which can be advantageous as smaller banks may not offer the longer terms found at some larger banks. Although laddering is most common with CDs, this strategy may be employed on any time deposit account with similar terms.
Some institutions use a private insurance company instead of, or in addition to, the Federally backed FDIC or NCUA deposit insurance. Institutions often stop using private supplemental insurance when they find that few customers have a high enough balance level to justify the additional cost.
The Certificate of Deposit Account Registry Service
program allows investors to keep up to $50 million invested in CDs managed through one bank with full FDIC insurance. However rates will likely not be the highest available.
In the US, the federally required "Truth in Savings"
booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information; only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.
a mortgage
.
Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors. Instead of owning the entire CD, each investor owns a piece. If several investors own the CD, the deposit broker may not list each person's name in the title but the account records should reflect that the broker is merely acting as an agent (e.g., "XYZ Brokerage as Custodian for Customers"). This ensures that each portion of the CD qualifies for up to $100,000 of FDIC coverage.
In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty for early withdrawal. In those cases, the deposit broker will instead try to resell the CD if the investor wants to redeem it before maturity. If interest rates have fallen since the CD was purchased, and demand is high, he/she may be able to sell the CD for a profit. But if interest rates have risen, there may be less demand for such lower-yielding CD, which means that he/she may have to sell the CD at a discount and lose some of the investor’s original deposit.
Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal agency licenses, examines, or approves them.
In the event of bank failure, FDIC insurance applies but may be more difficult to realize. Direct deposit CDs are often allowed to mature at the original rate by the acquiring bank, but brokered accounts usually stop paying interest immediately. Brokered depositors may not be timely notified. Further, the FDIC will pay claims on direct deposits within 7–10 days, brokered CD claims may take 30–60 days. Additionally, the FDIC may require that brokered depositors prove they do not hold simultaneous direct and brokered deposits which exceed FDIC limits.
These certificates of deposit can be tied to a bond or stock index or a reference rate like the Treasury bills, Prime Rate or the Consumer Price Index.
.
is the same in both cases.
In this situation, it is a misinterpretation that the interest is an increase in value. However, to keep the same value the rate of withdrawal must be the same as the real rate of return, in this case, zero. People may also think that the higher-rate situation is "better," when the real rate of return is actually the same.
Also, the above does not include taxes
. When taxes are considered, the higher-rate situation above is worse, with a lower (more negative) real return, although the before-tax real rates of return are identical. The after-inflation, after-tax return is what's important.
Ric Edelman
writes, "You don't make any money in bank accounts (in real economic terms), simply because you're not supposed to."; on the other hand, bank accounts and CDs are fine for holding cash for a short amount of time.
However Mr. Edelman's opinions may apply only to "average" CD interest rates. In reality, some banks pay much lower than average rates while others pay much higher rates (differences of 100% are not unusual, e.g., 2.50% vs 5.00%). In the United States, depositors can take advantage of the best FDIC-insured rates without increasing their risk. Furthermore, a long-term CD might have a high nominal interest rate
with a relatively low real interest rate due to high inflation at the time of purchase (as indicated above); however inflation rates often change rapidly and the final real interest rate could be significantly higher than riskier investments.
Finally, Mr. Edelman's statement that "CD interest rates closely track inflation" is not necessarily true. For example, during a credit crunch
banks are in dire need of funds and CD interest rate increases may not track inflation.
Time deposit
A time deposit is a money deposit at a banking institution that cannot be withdrawn for a certain "term" or period of time...
, a financial product commonly offered to consumers in the United States by banks, thrift institutions
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
, and credit union
Credit union
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s.
CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank". CDs are insured by the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) for banks and by the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
(NCUA) for credit unions. They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
. It is intended that the CD be held until maturity
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
, at which time the money may be withdrawn together with the accrued interest.
In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, although this may not be the case in an inverted yield curve
Yield curve
In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...
situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid-2004, interest rates were expected to rise, many banks and credit unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
, the bond market
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
, or other indices are introduced.
A few general guidelines for interest rates are:
- A larger principalDebtA debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
should receive a higher interest rate, but may not. - A longer term will usually receive a higher interest rate, except in the case of an inverted yield curve (i.e. preceding a recession)
- Smaller institutions tend to offer higher interest rates than larger ones.
- Personal CD accounts generally receive higher interest rates than business CD accounts.
- Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.
How CDs work
CDs typically require a minimum deposit, and may offer higher rates for larger deposits. In the US, the best rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000. However there are also institutions that do the opposite and offer lower rates for their "Jumbo CDs".The consumer who opens a CD may receive a passbook
Passbook
A passbook or bankbook is a paper book used to record bank transactions on a deposit account. Depending on the country or the financial institution, it can be of the dimensions of a chequebook or a passport....
or paper certificate. It is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.
Closing a CD
Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of six months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity—unless the holder has another investment with significantly higher return or has a serious need for the money. Banks will charge a penalty fee if the money is withdrawn from the CD before it matures.Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new CD). Generally, a "window" is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened not to roll over the CD).
CD refinance
In the U.S. insured CDs are required by the Truth in Savings Regulation DDTruth in Savings Act
The Truth in Savings Act is a United States federal law that was passed on December 19, 1991. It was part of the larger Federal Deposit Insurance Corporation Improvement Act of 1991 and is implemented by Regulation DD...
to state at the time of account opening the penalty for early withdrawal. It has been generally accepted that these penalties cannot be revised by the depository prior to maturity. However, there have been a couple of cases recently where a credit union modified their early withdrawal penalty and made it retroactive on existing accounts. The second occurrence happened when Main Street Bank of Texas closed a group of CDs early with out full payment of interest. The bank claimed the disclosures allowed them to do so.
The penalty for early withdrawal is the deterrent to allowing depositors to take advantage of subsequent enhanced investment opportunities during the term of the CD. In rising interest rate environments the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. The added interest from the new higher yielding CD may more than offset the cost of the early withdrawal penalty.
Ladders
While longer investment terms yield higher interest rates, longer terms also may result in a loss of opportunity to lock in higher interest rates in a rising-rate economy. A common mitigation strategy for this opportunity costOpportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
is the "CD ladder" strategy. In the ladder strategies, the investor distributes the deposits over a period of several years with the goal of having all one's money deposited at the longest term (and therefore the higher rate), but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.
For example, an investor beginning a three-year ladder strategy would start by depositing equal amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From this point on, a CD will reach maturity every year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor would have all money deposited at a three-year rate, yet have one-third of the deposits mature every year (which can then be reinvested, augmented, or withdrawn).
The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank, which can be advantageous as smaller banks may not offer the longer terms found at some larger banks. Although laddering is most common with CDs, this strategy may be employed on any time deposit account with similar terms.
Deposit insurance
In the US, the amount of insurance coverage varies depending on how accounts for an individual or family are structured at the institution. The level of insurance is governed by complex FDIC and NCUA rules, available in FDIC and NCUA booklets or online. The standard insurance coverage is currently $250,000 per owner or depositor for single accounts or $250,000 per co-owner for joint accounts.Some institutions use a private insurance company instead of, or in addition to, the Federally backed FDIC or NCUA deposit insurance. Institutions often stop using private supplemental insurance when they find that few customers have a high enough balance level to justify the additional cost.
The Certificate of Deposit Account Registry Service
Certificate of Deposit Account Registry Service
The Certificate of Deposit Account Registry Service , is a private, patented, for-profit service that breaks up large deposits and places them across a network of more than 3000 banks and savings associations around the United States...
program allows investors to keep up to $50 million invested in CDs managed through one bank with full FDIC insurance. However rates will likely not be the highest available.
Terms and conditions
There are many variations in the terms and conditions for CDs.In the US, the federally required "Truth in Savings"
Truth in Savings Act
The Truth in Savings Act is a United States federal law that was passed on December 19, 1991. It was part of the larger Federal Deposit Insurance Corporation Improvement Act of 1991 and is implemented by Regulation DD...
booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information; only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.
- The CD may be callable. The terms may state that the bank or credit union can close the CD before the term ends.
- Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the CD.
- Interest calculation. The CD may start earning interest from the date of deposit or from the start of the next month or quarter.
- Right to delay withdrawals. Institutions generally have the right to delay withdrawals for a specified period to stop a bank runBank runA bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
. - Withdrawal of principal. May be at the discretion of the financial institution. Withdrawal of principal below a certain minimum—or any withdrawal of principal at all—may require closure of the entire CD. A US Individual Retirement AccountIndividual Retirement AccountAn individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
CD may allow withdrawal of IRA Required Minimum DistributionsIRA Required Minimum DistributionsRequired Minimum Distributions, often referred to as RMDs, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans.-Lifetime distributions:...
without a withdrawal penalty. - Withdrawal of interest. May be limited to the most recent interest payment or allow for withdrawal of accumulated total interest since the CD was opened. Interest may be calculated to date of withdrawal or through the end of the last month or last quarter.
- Penalty for early withdrawal. May be measured in months of interest, may be calculated to be equal to the institution's current cost of replacing the money, or may use another formula. May or may not reduce the principal—for example, if principal is withdrawn three months after opening a CD with a six-month penalty.
- Fees. A fee may be specified for withdrawal or closure or for providing a certified checkCertified checkA certified check or certified cheque is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check, and so certifies, at the time the check is written. Those funds are then set aside in the bank's internal account until the check is cashed or returned...
. - Automatic renewal. The institution may or may not commit to sending a notice before automatic rollover at CD maturity. The institution may specify a grace period before automatically rolling over the CD to a new CD at maturity. Be careful as some otherwise respectable banks have been known to renew at scandalously low rates.
Other similar products
This article has described the familiar FDIC-insured or NCUA-insured CDs which are usually purchased by consumers directly from banks or credit unions. There are also "certificates of deposit" issued by various entities that do not carry insurance.Callable CDs
A callable CD is similar to a traditional CD, except that the bank reserves the right to "call" the investment. After the initial non-callable period, the bank can buy (call) back the CD. Callable CDs pay a premium interest rate. Banks manage their interest rate risk by selling callable CDs. On the call date, the banks determine if it is cheaper to replace the investment or leave it outstanding. This is similar to refinancingRefinancing
Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...
a mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
.
Brokered CDs
Many brokerage firms – known as "deposit brokers" – offer CDs. These brokerage firms can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain number of deposits to the institution.Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors. Instead of owning the entire CD, each investor owns a piece. If several investors own the CD, the deposit broker may not list each person's name in the title but the account records should reflect that the broker is merely acting as an agent (e.g., "XYZ Brokerage as Custodian for Customers"). This ensures that each portion of the CD qualifies for up to $100,000 of FDIC coverage.
In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty for early withdrawal. In those cases, the deposit broker will instead try to resell the CD if the investor wants to redeem it before maturity. If interest rates have fallen since the CD was purchased, and demand is high, he/she may be able to sell the CD for a profit. But if interest rates have risen, there may be less demand for such lower-yielding CD, which means that he/she may have to sell the CD at a discount and lose some of the investor’s original deposit.
Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal agency licenses, examines, or approves them.
In the event of bank failure, FDIC insurance applies but may be more difficult to realize. Direct deposit CDs are often allowed to mature at the original rate by the acquiring bank, but brokered accounts usually stop paying interest immediately. Brokered depositors may not be timely notified. Further, the FDIC will pay claims on direct deposits within 7–10 days, brokered CD claims may take 30–60 days. Additionally, the FDIC may require that brokered depositors prove they do not hold simultaneous direct and brokered deposits which exceed FDIC limits.
Bump-up CDs
A Bump Up CD allows the account holder the option to increase the interest rate once during the term of the CD. Upon request, the bank will “bump up” the interest rate on the certificate of deposit to a higher rate being offered by the issuing bank on that CD (or a comparable term CD). The rate change does not change the original maturity date of the CD.Liquid CDs
This type of CD is generally a fixed rate certificate of deposit, which allows you to withdraw a portion of the original deposit during the term without paying a penalty. There will be some limits on when you can take the money out, the amount that can be withdrawn and how many separate withdrawals you can make from the CD.Step-up CD or step-down CDs
These can also be called a flex CD and can be confused with a Bump Up CD. Certificates of deposit with a step up or down feature have a fixed interest rate for a period of time, usually one year and then the interest rate automatically rises up to a predetermined rate or is lowered to a predetermined rate.Variable-rate CDs
Unlike traditional CDs that pay a fixed rate of interest, a variable rate CD or index based CD is tied to the outcome of a market index. The interest you earn at maturity is based on the percentage gain (or loss) to the final Index value.These certificates of deposit can be tied to a bond or stock index or a reference rate like the Treasury bills, Prime Rate or the Consumer Price Index.
Add-on CDs
These are fixed or variable rate CDs to which you can make additional deposits. There can be restrictions, such as a minimum deposit that can be made to the account.Zero-coupon CD
These certificates of deposit are issued at a substantial discount from the face amount of the CD. Typically the maturity terms are much longer, 15 to 20 years, which results in the discounted price. Zero coupon CDs do not pay interest until the maturity date.CD in India
In India, it is short term money market instrument which fulfill the short term need of commercial banks and customers of CD can get rate of interest which is calculated by money market demand and supply. It is usually known as fixed depositFixed deposits (Indian banking)
Fixed deposits are a kind of high-interest-yielding deposit offered by banks in India, where bank accounts can be broadly categorised into 2 types :...
.
Criticism
CD interest rates closely track inflation. For example, in one situation interest rates may be 15% and inflation may be 15%, and in another situation interest rates may be 2% and inflation may be 2%. Of course, these factors cancel out, so the real interest rateReal interest rate
The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate...
is the same in both cases.
In this situation, it is a misinterpretation that the interest is an increase in value. However, to keep the same value the rate of withdrawal must be the same as the real rate of return, in this case, zero. People may also think that the higher-rate situation is "better," when the real rate of return is actually the same.
Also, the above does not include taxes
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
. When taxes are considered, the higher-rate situation above is worse, with a lower (more negative) real return, although the before-tax real rates of return are identical. The after-inflation, after-tax return is what's important.
Ric Edelman
Ric Edelman
Ric Edelman is the chairman and CEO of Edelman Financial Services, LLC., the author of several personal finance books and the host of a syndicated weekly personal finance talk radio show called The Ric Edelman Show...
writes, "You don't make any money in bank accounts (in real economic terms), simply because you're not supposed to."; on the other hand, bank accounts and CDs are fine for holding cash for a short amount of time.
However Mr. Edelman's opinions may apply only to "average" CD interest rates. In reality, some banks pay much lower than average rates while others pay much higher rates (differences of 100% are not unusual, e.g., 2.50% vs 5.00%). In the United States, depositors can take advantage of the best FDIC-insured rates without increasing their risk. Furthermore, a long-term CD might have a high nominal interest rate
Nominal interest rate
In finance and economics nominal interest rate or nominal rate of interest refers to the rate of interest before adjustment for inflation ; or, for interest rates "as stated" without adjustment for the full effect of compounding...
with a relatively low real interest rate due to high inflation at the time of purchase (as indicated above); however inflation rates often change rapidly and the final real interest rate could be significantly higher than riskier investments.
Finally, Mr. Edelman's statement that "CD interest rates closely track inflation" is not necessarily true. For example, during a credit crunch
Credit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
banks are in dire need of funds and CD interest rate increases may not track inflation.
External links
- The US SEC on buying CDs
- North American Securities Administrators Association on buying CDs.
- 2007 US Department of Justice filing "...a scheme to defraud investors, many of them elderly, of approximately $3,661,248 by selling the investors fraudulent certificates of deposit."