7. Certificates of deposit What Are Certificates of Deposit (CDs) and How Do They Work? Certificates of deposit (CDs) offer higher interest rates than could be earned on either a negotiable order of withdrawal (NOW) account or a statement (passbook) savings account. Depending upon the preferences of the financial institution at the time, savers can purchase CDs that will carry either a fixed or an adjustable rate of interest. CDs can also be purchased from depository or some non-depository institutions, and may or may not be protected by deposit insurance, depending on the nature and terms of the account. To protect yourself from unwanted surprises, it is critical that you ask questions of the institution that issues a CD that you purchase and know the exact characteristics and terms of any CD in which you invest. Not all CDs are alike. There are two major classes of CDs: fixed-rate and variable-rate instruments. How do they differ? over the life of the investment, while a variable-rate CD carries A fixed-rate CD is characterized by an interest rate that an interest rate that during its life. Thinking about the characteristics of fixed- and variable-rate CDs from the perspective of a saver, complete the following statements. of its interest rate, which allows the saver to accurately anticipate his or her . An important characteristic of a fixed-rate CD is the expected earned interest income. An important characteristic of a variable-rate CD, on the other hand, is its interest rate's ability to keep pace with changes in What are the implications of the characteristics of an adjustable-rate CD for a saver? O On the positive side, this means that savers will know in advance how much interest income they will earn, but on the negative side, savers will earn less interest income if interest rates increase while their funds are invested. On the positive side, this means that savers can potentially earn more interest when market interest rates increase, but on the negative side, savers will earn less interest when market interest rates go down. Where can you purchase CDs? In addition to obtaining CDs from commercial banks, savings associations, and credit unions, you can obtain them from your stockbroker. These investments, which tend to pay higher interest rates than those available in banks, are called CDs. Would you expect an uninsured investment certificate to pay a higher or lower interest rate than a CD that is protected by deposit urance, and why? Assuming that everything else is equal: . the uninsured investment certificate should pay a interest rate than an otherwise equal and insured CD; and this relationship should exist because the uninsured investment certificate exposes the saver to a risk of loss, in the event that the issuing firm fails