What Is a High Yield CD?
- According to the Federal Deposit Insurance Corporation (FDIC), a CD is a special type of bank account offering a higher rate of interest than a typical savings account. When you purchase a high-yield CD, you agree to leave your money in the bank for a designated period of time and the bank agrees to pay you interest in return.
- Most CDs have a penalty for early withdrawal of funds. This can be a forfeiture of interest earned or a fixed fee. Some investors "ladder" their CDs by putting some money in long-term accounts, such as a five-year CD, that offer a high yield and some money in shorter-term accounts that mature in one or two years but offer a lower interest rate.
- Check the terms of a CD before investing. Some high-yield CDs have a "call" feature that allows the bank to end the CD before it reaches maturity if interest rates fall. The "call" feature does not allow the investor to withdraw the funds without penalty. Read the fine print and ask about all the details you do not understand. The FDIC warns that some advertised high-yield CDs that sound too good to be true are marketing ploys or, worse, are uninsured. Only open a CD with an FDIC-insured institution; this ensures your money is protected up to $250,000.