Variable-Rate Certificate of Deposit
What it is:
A variable-rate certificate of deposit (CD) is a CD with an interest rate that can change.
How it works (Example):
A CD is an investment again until the of the CD is up, which can be anywhere from one month to several years long.whereby the investor a certain amount of with a bank or , which agrees to pay interest on that for the of the . Generally, the depositor cannot access the
Most investors opt for fixed-rate prime rate, or other rates. Often, the interest an institution pay on a variable-rate equals the percentage change in the associated or rate over the of the CD., which pay a flat rate of interest. However, some institutions also variable-rate , which interest rates based on Treasury bills, indexes, the
For example, if the duration of the , the difference is the interest rate on the variable rate -- in this case, the difference in the prime rate is 3%, which is what the investor earn.is based on the changes in the prime rate and the prime rate increases from 5% to 8% over the
Why it Matters:
are one of the most conservative there are, and the interest rates on them tend to be very low. Variable-rate investors the opportunity to receive higher returns if interest rates in other areas of the markets go up. Of course, the opposite is true: If rates go down, the interest rate on a variable CD can also decrease.