Interest Features

Fixed Rate

Many CDs pay interest at a fixed rate for the term of the CD. The interest may be compounded or simple. Interest may be paid to you periodically during the term of the CD or at maturity.

Variable Rate

CDs may offer rates that change periodically during the CD's term. With such CDs you need to understand how the interest rate is calculated and how often the rate can be re-set.

CDs that re-set the rate periodically are referred to as "floating rate" CDs because the rate "floats" during the term of the CD. These CDs may re-set the rate at pre-determined intervals against any number of common financial references – Treasury securities, the prime rate or some other index. If these indices decline, so will the rate on the CD. The APY will reflect the rate in effect at the time you purchase the CD.

CDs that change to a pre-determined rate at pre-determined times are referred to as "step rate" CDs. These CDs will have an interest rate that is fixed for a period of time and then "step up" or "step down" to another fixed rate. The steps may occur more than once before the CD matures. The APY on step rate CDs will reflect the total interest to be paid during the life of the CD, so it will be less than the highest step rate, but more than the lowest step rate.

Contingent Rate

The rate on some CDs is determined by the outcome of some event or the performance of a financial index. For example, many banks offer CDs that pay interest linked to the performance of the stock market. You receive the percentage increase in the value of the stock market over a period of time. If the value of the stock market does not increase, you may receive no interest. In many cases, a contingent rate CD will have an APY of 0%. This reflects the fact that the CD has no stated interest rate and the interest rate cannot be determined at the time you purchase the CD.

Zero Coupon

Zero coupon CDs are sold at a discount to their face amount and pay the entire face amount at maturity. For example, you may pay $900 for a $1,000 CD and receive the full $1,000 at maturity. At maturity, you will have received $100 in interest.