As its name suggests, a variable-rate CD is a type of CD which has a variable interest rate. This means that its interest will vary depending on the different rate-changing factors. Variable rate is good for investors who like to play along with the fluctuations in the interest rate.
Fundamentals of Variable-Rate CDs
Standard CDs and variable-rate CDs have differences and similarities. One obvious similarity is that, investors in VR CDs should also deposit in a CD account. The money will be locked into the CD account until the specified maturity time. By that time, the money, along with the accumulated interest, can be taken out by the patiently waiting investor.
However, unlike the standard CD in which the interest rate is steady, the interest in a variable-rate is dynamic. The disadvantage of having a fixed interest is that when the interest rises, your bank CD will not be earning what you could have earned. On the other hand, if you let your interest rate as a variable, you could earn what you could be earning during the time when the interest increases. This means that the CD investor would be lucky if the CD rate goes up. Conversely, you won’t have any choice but to ride with the rates, if the interest rate goes down. So if you are one bored investor, investing in this kind of CD will bring excitement to you.
Analysis for Variable-Rate CDs
There are a lot of factors affecting the interest rate of a VR Certificate of Deposit. The most common one is the U.S. Treasury note rate. Other rate-changing factors are the market index, consumer price index, and prime rate. Investors who want a higher payoff may want to consult a financial brokerage firm to find them some nifty rates. This way, investors will have a greater chance of being lucky than not.
A variable-rate CD is no ordinary CD. It requires a special type of attention and analysis for your investment to be more profitable. An investor may need to check on the latest trends and patterns on underlying indexes, common benchmarks, and fluctuations on foreign currencies. It is recommended to have a conversation with a good financial consultant before purchasing a VR CD account. Due to the big risk when investing in this type of CD, the average interest rate on a VR CDs more often, surpasses that of an ordinary CD.