What is a Bump-Up CD?
A bump-up certificate of deposit (CD), also called a step-up CD, is a certificate of deposit that allows the owner to “bump up” the interest rate if rates should rise during the CDs’ holding period.
A bump-up CD will typically offer a slightly lower rate than a CD without the option, due to its flexibility.
How a Bump-Up CD Works
A bump-up CD functions just as a traditional CD, with one small twist: you may elect to increase the interest rate once during the term of the CD. Longer term CDs may allow multiple bump-ups.
With the purchase of a conventional CD, you are locked in for a fixed period of time at a fixed rate, only to collect principal and interest at the end of the term. You may withdraw funds sooner but will incur a penalty.
Bump-Up CD Example
Let’s say a bank issues a certificate of deposit with a 7-year maturity date and a bump up option. At the time of purchase, the interest rate on the CD is set at 2.5%. Two years later comparable interest rates are now 3.5%. Investors may exercise their bump-up benefits, and increase their yield to the higher rate of 3.5%.
Is a Bump-CD Right for You?
A bump-up CD is a good option for an active investor who understands interest rate trends.