The Interest Rate Risk of CDs

Read this tip to make your life smarter, better, faster and wiser. LifeTips is the place to go when you need to know about CDs and other Financial Planning topics.

Is there any risk in investing in CDs?

The Interest Rate Risk of CDs

There is no such thing as a risk-free investment. Even something as low-risk as a CD carries with it some risk. This is something you must keep in mind when conducting a CD interest rate comparison.

Interest Rate Risk
The biggest risk associated with CDs is called interest rate risk . Interest rate risk is the general risk that you could get locked in to an unattractive interest rate while outside rates increase. Interest rates offered on CDs are determined by many things including the general interest rate environment (which is driven by the Fed rate) and the credit environment. When interest rates are high and credit is flowing, CD rates will generally be high. But when interest rates are lowered in an effort to get more people borrowing and credit isn't being extended, CD rates will be lower because banks can't make as much money on the cash. If you lock yourself in to a 5-year CD at a low rates and during that term interest rates increase so that new CDs have a much more competitive rates, then you are suffering the effects of interest rate risk.

So keep this risk in mind as you do your CD interest rate comparison and determine how long you want to be locked in to one rate.

   

Comments

Nobody has commented on this tip yet. Be the first.



Name:


URL: (optional)


Comment:


Not finding the advice and tips you need on this Financial Planning Tip Site? Request a Tip Now!


Guru Spotlight
Lynne Christen