Step Up and Step Down Cds–What are they? Introduction:
Finding the right investment venture can be a difficult task for investors. Some investment options come with low risks and others come with high risks. Research is the best way to take advantage of the best investments that can earn money for investors. CDs have long been one of those safe investments that investors can rely on to earn interest on their principle investments. Although traditional CDs are good investments, they do not offer a great amount of flexibility. Step up and step down CDs do offer flexibility. The rates are not fixed on these types of CDs, and investors love the freedom that step up and step down CDs offer them.
How do Step Up and Step Down Certificate of Deposit CDs Work?
Step up and step down CDs are investment opportunities that offer investors a fixed interest rate for a certain amount of time. In most cases, the amount of time is one year. After this time, the interest rate automatically increases or decreases to a predetermined interest rate. Issuers have exclusive control over when the interest rates go up or down to current rates. Many investors confuse step up and step down CDs with bump-up CDs. Bump up CDs allow investors to request a rate increase before the terms end. Unlike bump-up CDs, issuers control the interest rate changes with step up and step down CDs.
Advantages of Step Up and Step Down Certificate of Deposit CDs
- Investors benefit from interest rate increases. Step up and step down CDs allow investors to receive rate increases before the maturity date of their CDs. Traditional CDs do not offer this option. Other non-traditional CDs require that investors make requests to receive increases, and these increases may take several months. Step up and step down CDs increase automatically.
- The principle remains safe. No matter what direction the issuer takes the interest rates, investors know that their principle investment is safe. Investors invest their money in CDs because they want to protect the beginning deposit.
- The investment is FDIC insured. The FDIC insures CD investments up to$250,000. Investors can be sure that their step up and step down CDs are safe in FDIC insured financial institutions. Investors should always check to make sure that the financial institution that holds their money has this protection.
- Investors do not have to search for better rates. Investors do not have to run around to find better rates. Step up and step down CDs increase automatically to a predetermined interest rate so investors do not have to do any research. Since the increase is automatic, investors benefit from the rate increase faster than they would with other CD options.
Disadvantages of Step Up and Step Down Certificate of Deposit CD
- Investors lose money if rates decrease. If rates do not increase, investors may lose money in step up and step down CDs. The interest rate may adjust automatically to a predetermined rate that is lower than the original rate received. Lower interest rates cost investors their present and future interest rates until the CDs mature.
- Issuers control the increases and decreases. This drawback gives exclusive control over the adjusted interest rate to the issuer. Traditional CDs give investors the option to adjust their interest rates during the terms of their CDS. The process is automatic so investors have no control over their money.
- The increases are unpredictable. There is no way to tell whether interest rates will go up or down in this economy. The rates are so unpredictable that investing in step up and step down CDs may be detrimental to investors. Interest rates have continued to decrease after the spike in the 1980s so it seems more likely that the rates will continue to decrease. The unpredictability is what makes step up and step down CDs such a risky investment option.
- Investors do not benefit from increases until the step up and step down date. Step up and step down CDs have a fixed rate until the rates increase or decrease. In the event that rates increase before the step up date, investors do not get the opportunity to benefit from this increase.
Investors have a variety of options when it comes to investing in CDs. Step up and step down CDs offer a unique opportunity for investors to receive interest rate increases and decreases automatically. There are pros and cons to investing in step up and step down CDs. Investors have the freedom to choose if this investment is right for them.