CDs can be a hit for investors

By PHIL MULKINS

Investing in certificates of deposit is not first base in your sprint for the financial security of touching home plate -- it's second base. First base is your emergency fund -- the three- to six- month supply of liquid cash you'll need if you lose your job or strike out in some other way.

CD money is not liquid. It must be left untouched for its term, or the time period to maturity, to earn interest at the fixed rate stated on the certificate's face when you purchase it. That can be anywhere from three months to five years.

Bankrate.com offers "Investing Basics" -- at tulsaworld.com/ BANKinvesting -- to help investors deal with liquid savings, CDs, bonds, fixed income, etc.

CDs are excellent for saving money and earn a higher interest rate than money market investments or bonds. Their drawback is not being liquid. They tie up funds for their term, and cashing them early costs interest earnings and in some cases the principal.

CDs are time-based, fixed-income investments issued by banks, credit unions and brokerage houses. Some banks require you to visit their brick-and-mortar locations to open CD accounts while others let you open them online. Online rates are best because the issuers have no bricks or mortar to maintain.

CDs guarantee fixed amounts of interest, added to your account periodically throughout the term. Longer-term CDs may yield periodic interest payments at specific intervals. As terms expire, you may cash out or roll them over for other terms. They are also federally insured for up to $250,000 per account and come in four flavors.

Traditional: This CD is an investment of a fixed amount of money for a specific term for a predetermined interest rate. You have the option of cashing out at the end of the term or rolling over the CD for another term. Most institutions allow you to add additional funds during the term or when rolling over. Penalties for early withdrawal can be stiff, and no law prevents institutions from enacting tougher penalties as long as they are disclosed beforehand.

Bump-up: These take advantage of rising interest rates and let you bump up to a higher rate for the remainder of the term. Institutions offering this option usually allow only one bump-up per term. The drawback is that you might get a lower initial rate than on a traditional CD, and the longer it takes rates to rise the higher they'll have to rise to make up for the earlier, lower-rate portion of the term.

Zero-coupon: As with zero-coupon bonds, there are zero-coupon CDs. They offer deep discounts to par value, which means their value at maturity. "Coupon" refers to an interest payment, and zero- coupon means they carry no interest payment.

Liquid: These feature the opportunity to withdraw money from the account without penalty, although you must keep a minimum balance in the account for the privilege. The interest rate on a liquid CD is higher than a bank money market rate, but it's lower than a traditional CD of the same term and minimum. Of primary importance is the timing of how soon after opening the account that withdrawals may be made. Federal law requires money to stay in the account seven days before any withdrawal without penalty.

Another consideration is the number of withdrawals allowed. You must weigh the convenience of liquidity against sacrificed return for the right to withdraw.

Don't strike out by making uninformed choices

The Federal Deposit Insurance Corp. announced in mid-June that investors should be wary of "tempting CD rates" in their quest for good returns. The agency is receiving inquiries and complaints about certain companies advertising above-market interest rates for CDs that are supposedly federally insured.

Some of these ads display the FDIC logo or state "FDIC Insured" when in fact they are not. Many of these CD issuers are not banks but are insurance or financial service companies selling uninsured financial products. Small print in the ads might state that the companies are not FDIC-insured financial institutions, or it might not.

Consumers should carefully consider whether uninsured products are appropriate for their personal financial situations. Verify whether certain financial institutions offering financial goods for sale are FDIC-insured at tulsaworld.com/FDICinsureddeposits .

Advertising for such CDs generally offers above-market interest rates for a short time only, requires large minimum amounts and insists that customers visit company offices. The goal is to attract consumers for the company's non-deposit products or services.

When customers ask to purchase the advertised CDs, company staff often direct them to computer terminals in the office to purchase the CDs from FDIC-insured financial institutions accepting Internet deposits. The CDs are offered at rates lower than those advertised. The company typically writes a separate check to the financial institution for the difference between the bank's rate and the advertised rate for the term of the CD. Both checks are mailed to the bank, and the bank then issues the CD for the increased amount, but at the bank's lower interest rate.

Consumers should understand the terms of CDs they plan to purchase and research interest rates at Web sites such as tulsaworld.com/Bankrate .

Tulsa World consumer writer Phil Mulkins wants to know which topics interest you most. Call 699-8888 or e-mail your interest to

Originally published by PHIL MULKINS World Staff Writer.

(c) 2009 Tulsa World. Provided by ProQuest LLC. All rights Reserved.

A service of YellowBrix, Inc.