Variable-Rate Certificate of Deposit
What is a Variable-Rate Certificate of Deposit?
A variable-rate certificate of deposit (CD) is a CD with an interest rate that can change.
How Does a Variable-Rate Certificate of Deposit Work?
A CD is an investment again until the of the CD is up, which can be anywhere from one month to several years long.
Most investors opt for fixed-rate , which pay a flat rate of interest. However, some institutions also variable-rate , which interest rates based on Treasury bills, indexes, the prime rate, or other rates. Often, the interest an institution pay on a variable-rate equals the percentage change in the associated or rate over the of the CD.
For example, if the is based on the changes in the prime rate and the prime rate increases from 5% to 8% over the duration of the , the difference is the interest rate on the variable rate -- in this case, the difference in the prime rate is 3%, which is what the investor earn.
Why Does a Variable-Rate Certificate of Deposit Matter?
are one of the most conservative there are, and the interest rates on them tend to be very low. Variable-rate investors the opportunity to receive higher returns if interest rates in other areas of the markets go up. Of course, the opposite is true: If rates go down, the interest rate on a variable CD can also decrease.