Americans have always looked to the federally insured certificate of deposit as one of the ultimate conservative investments. The problem is that during low-interest-rate periods, such as this one, they're about as exciting as watching paint dry.
Financial institutions, concerned about mundane CD yields, are trying to pep up the product. Some innovative CDs let you set your length of maturity almost to the day. Others permit you to add money to the CD throughout the year. A few have rates tied to a variety of indexes, among them the cost of college tuition.
Another example is the so-called "bump-up" CD, giving you one or two opportunities to get higher returns if the bank raises CD rates after you purchase yours. The "step-up" CD offers rates that move up at a predetermined time, such as every three months. There are also zero-coupon CDs at some investment firms, sold at a discount from face value. Interest isn't paid on a regular basis, but instead accrues annually until maturity.
It pays to examine all choices. If anything is too confusing, or if actual dollar amount at maturity is difficult to figure, watch out.
"Because of declining rates and the movement of CD money into money-market mutual funds, we offer CDs that aren't the standard variety," said Mitch Ratliff, vice president with Chase Manhattan Bank. "Our flexible CD lets the customer pick his maturity from 31 days to five years, while our bonus programs offer either a higher rate or a cash amount to existing clients who decide to stay with us."
Wells Fargo Bank's expandable one-year CD lets investors add money, so long as they don't add more than the size of the initial investment.
"We're attempting to recondition our clients about CDs, offering more options to rekindle their interest," said Mary Essary, spokeswoman for Wells Fargo. "People like single accounts in which they can make deposits, and our expandable CD makes it easier for a client to save."
The CollegeSure CD, insured by the Federal Deposit Insurance Corp., has a rate which moves along with the cost of college. You can open an account for $1,000.
"Our CollegeSure CDs pay an annual rate of return linked to the cost of college cost inflation, as measured by the College Board's Independent College 500 Index," explained Peter Robert, an executive with the College Savings Bank in Princeton, N.J., whose telephone number is (800) 888-2723. "As the cost of tuition, fees, room and board keeps increasing, our CD makes sure that you have adequate funds to meet future college costs."
Investment firms are in the CD chase, primarily through brokered CDs which brokerages buy from institutions around the country. They're also federally insured.
"Most clients are in CDs of one year or less, but more and more they're purchasing longer-term two-, three-, four- or five-year CDs because they believe interest rates might trend slightly lower for a while," said Randy Gretz, group vice president for taxable fixed-income at Merrill Lynch & Co. "We shop the country for quality CDs from various financial institutions for our brokered CD program, so our rates offered on these tend to be better than the average CD you'd find at a local bank or savings & loan."
The current rate scenario isn't likely to get more exciting, with any movement up or down quite minor, so there isn't much reward for tying up money long-term.
According to 100 Highest Yields, the top six-month yield nationally at a federally insured institution recently was 6.36 percent at First Federal Savings Bank of Delaware, Wilmington, Del., requiring a $500 minimum. Top one-year yield was 6.75 percent at Fidelity Federal Savings Bank, Richmond, Va., $1,000 minimum. The high five-year was 8 percent at New South Federal Savings, Birmingham, Ala., requiring $1,000.