Variable-Rate CD
What Is a Variable-Rate CD?
A variable-rate certificate of deposit (CD) is a type of savings product that earns interest at a rate that may change over time. Unlike traditional fixed-rate CDs, where the interest rate remains constant for the entire term, variable-rate CDs allow the interest rate to adjust periodically based on market conditions.
These CDs are offered by banks and credit unions as an alternative savings option.
Why It Matters
Variable-rate CDs can provide the opportunity to earn higher interest if market rates rise. However, they may also earn less if interest rates decline.
Understanding variable-rate CDs helps savers evaluate whether they prefer stable returns from fixed-rate CDs or the flexibility of a rate that may change.
How Variable-Rate CDs Work
When a saver opens a variable-rate CD, the financial institution sets the initial interest rate and explains how the rate may change.
The rate may adjust based on:
- market interest rates
- benchmark rates
- scheduled review periods
Despite rate adjustments, the funds usually remain locked in until the CD reaches its maturity date.
Example
A saver opens a three-year variable-rate CD with an initial interest rate of 3%. If market interest rates increase during the term, the CD’s rate may rise, allowing the saver to earn more interest.
Variable-Rate CD vs Fixed-Rate CD
- A variable-rate CD has an interest rate that may change.
- A fixed-rate CD maintains the same interest rate throughout the term.
FAQs About Variable-Rate CDs
Can the interest rate decrease?
Yes. The rate may rise or fall depending on market conditions.
Do variable-rate CDs still have maturity dates?
Yes. Like other CDs, they typically have a set term.
Are variable-rate CDs riskier than fixed-rate CDs?
They may produce less predictable returns due to changing interest rates.
Related Terms
