High Interest Cd

High interest CD accounts, also known as certificates of deposit, can frequently offer the returns of riskier investments while also offering the protection of being covered by FDIC insurance. In today’s market where savings accounts frequently offer yields of under 0.1%, certificates of deposit are excellent vehicles for cash which will be left for a set period of time.

The economic principle of TANSTAAFL—there ain’t no such thing as a free lunch—applies to CD accounts. Financial institutions do not offer a higher return on CDs out of the goodness of their heart. The trade-off in a CD is that the money must be left in the bank and not touched for a set period of time. If the funds are removed prior to the maturity date, the financial institution will levy a penalty. Typical penalties for early withdrawals are three months’ interest on a one year CD, and six months’ interest on a longer-term CD. As an enticement to leave one’s money in a CD for a longer period of time, higher interest rates are offered.

Typically speaking, the highest CD rates come in one of two places. The first are internet banks. Since these banks lack an expensive retail branch structure, they can afford to pay more to attract new accounts. The second source of high rates are local banks who either can operate with thinner margins or are aggressively seeking new accounts to meet regulatory requirements to stay adequately capitalized. For most customers, name brand national banks will offer some of the lowest interest rates on CD accounts.

For those looking for a uniquely high interest CD account, it is important to be willing to make a long-term commitment. The difference between a one year and five year CD account can be significant. In fact, one national bank who is currently offering a paltry 0.25% APY on a one year CD is offering a much more attractive 2.25% APY on the same sum placed in a five year CD. Looking at the highest interest CD accounts, in the 2010 market one can expect to go from approximately 1.6% APY to 3.0% APY by going from one to five years.

Investors would do well to bear in mind that long-term commitments carry additional risk. If interest rates move up over the coming year, holders of a one year CD will be able to redeposit their money at the new higher rate. Those who are committed to a three or five year CD will be locked in at a rate which may end up being below market. This cuts both ways, though, and can significantly benefit savvy investors who lock in a long-term rate before interest rates come down. When devising a strategy for hedging against future changes in interest, it is worthwhile to note that the average 1 year CD in 2005 carried a 4.188% rate and in 2000 carried a 7.091% interest rate.

In all cases, one should consult with qualified investment advisers to determine which strategy is correct for one’s individual circumstances. By doing this, a high interest CD account can be not only a good place to park money, but also a part of a comprehensive investment strategy.