By sbup Staff
Need a refresher on some of the more common terms used in reference certificates of deposit (CDs)? Read on.
Bullet Strategy—Also called a “focused” strategy, a bullet strategy for CDs involves buying CDs at different times that are all set to mature at or around the same date. This strategy is used to accumulate savings for a particular goal like college tuition. Buying at different times helps hedge against market fluctuations.
Callable—A CD (or bond) that contains a provision permitting the issuer to close the account before it matures. With a callable CD, the principal and interest earned to date is returned to the investor or it can be rolled over into another CD at a different rate. This feature protects banks from paying higher interest when rates are falling.
CDARS (Certificate of Deposit Account Registry Service)—A service that allows investors to keep large deposits invested in CDs at one bank without exceeding FDIC insurance coverage. CDARS breaks up these deposits into smaller pieces and distributes them across a network of banking institutions.
Coupon—A synonym for interest payment. Derived from the bond industry, it refers to the coupons that used to be attached to bonds and had to be sent in to receive an interest payment. Zero-coupon CDs pay no interest payments.
Early Withdrawal Penalty—The penalty assessed by an issuer for withdrawing funds from a CD before it matures. The government imposes a penalty of at least seven days worth of interest, but banks can and do charge as much as they want above that. The terms of this penalty must be disclosed prior to purchase.
Laddering—A strategy that involves buying investment products at different times in order to get a better rate of return. CD Laddering is buying CDs with equal denominations and different maturity dates. This protects against market fluctuations and provides added liquidity.
Maturity—The date when a CD’s term is over and funds can be withdrawn without penalty. On a one-year CD the maturity is one year.
Par Value—a synonym for face value, this term refers to the value of a fixed-rate CD (or bond) when it matures. For example, a $25,000 zero-coupon CD has a par value of $25,000. Par value is calculated using the initial deposit and compounding the interest over the term of the CD.
Tiered—A term used to described CDs that offer different interest rates at different balance levels. With tiered CDs, accounts with higher balances have higher interest rates. Some CDs allow investors to add onto a CD before it matures to access a higher balance tier.
Yield—The total amount of interest earned when a CD matures. For example, a $1,000 one-year CD with a 5% interest rate would have a yield of $50 if it were compounded once a year. Yield is often expressed as an annual percentage (APY). The yield over the term of the loan is shown graphically as a yield curve.
For more definitions of investment terminology, check out sbup's glossary.