Indexed CDs are an important part of an investment portfolio. These investments are very safe and have low risks, but can provide a good return on money. A CD or Certificate of Deposit is an investment product that is sold by practically every bank in the united states. Investors can purchase this product for as little as $100 in some cases. The CD will be bought for a preset length of time, and will earn a preset amount of interest. At the end of the time period, the CD can be redeemed for the purchase price plus the earned interest. Cashing out the CD before the time period is complete will result on the investor having to pay penalties.
A CD typically offers higher interest rates than those offered in a standard savings account. This is because investors who buy CDs typically have their money pooled together by the bank and invested in safe investments such as federal and state bonds. The higher interest rates paid by these bonds is carried over to the investor. Traditionally, CD rates are set when the CD is purchased and do not change.
An indexed CD however, allows the interest rate being paid to the CD to change, however. An investor will still purchase a CD for a specified period of time, but the interest rate is tied to a common financial index such as the 10 year Treasury rate or the LIBOR. The interest rate that is paid can therefore rise or fall depending on this rate. Depending on the exact terms and conditions of the indexed CD, the interest rate can change anywhere from once to everyday.
Some indexed CDs will have an optional period where the investor can choose to opt-in to a rate change. Other indexed CDs will make the investor decide if he or she wants to have the rate adjusted when he or she purchases the CD. Some banks also offer promotions where the index rate will not fall, but only go up. Indexed CDs are a great way for an investor’s money to stay safe while earning a small amount of interest. They make ideal long or short term investments. Purchasing an indexed CD allows an investor to place their money in a safe, FIDC insured investment, but still allows for him or her to take advantage of a potential increase in interest rates. Many investors who choose this option buy long term CDs.