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Saving and Investing Money
Buy Broker CDs With Care
Savers look to buy CDs (Certificate of Deposit) once balances in
a passbook savings and interest-bearing checking accounts start to grow. CDs
usually pay higher rates. Most likely amounts are insured up to $100,000.
With interest rates declining, conservative investors are
looking for higher yields than checking or passbook accounts earn. CDs offered
by brokers carry higher rates than bank CDs. Large brokerage firms buy jumbo
CDs, which carry higher interest rates, and break them up in amounts suitable
for small investors.
If you don't understand the terms of the CD your broker is
selling, you may find you have little flexibility if you need your money. The
U.S. Securities and Exchange Commission recommends you consider the following
before you invest.
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Find out when the CD matures. Ask to see the maturity date
in writing. That is the date you can get your money back without penalty.
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Confirm the interest rate in writing on an official
disclosure document. Note if it is a fixed or variable rate. Ask how often the
bank pays interest and when, such as monthly, twice a year, and so on. Are you
paid by check or electronic funds transfer?
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Investigate call features. Callable CDs give the bank the
right to end the CD after a set period of time. You do not have this right. If
interest rates fall and the bank calls in the CD, when you buy a new CD, the
interest rate will be less. If interest rates go up and you want to cash in your
CD to earn higher yields elsewhere, you will pay a penalty.
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Understand the difference between call features and
maturity. A federally insured one-year non-callable CD only means it cannot be
cashed out by the bank for one year. Check the maturity date to learn when you
will get your money back without penalty. You may learn the CD is set up to
mature in 15 to 20 years. Only then may you be able to get your money back.
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Ask about penalties for early withdrawals.
If the broker
says there are no penalties, this may be misleading. Ask a probing question,
such as, "What happens if I find I need my money two years from now?"
You may learn that the broker must find a buyer for your CD. If interest rates
have fallen since you brought your CD, buyers won't pay enough to cover your
original deposit and accrued interest.
Ask yourself, if this investment makes sense today and for the
life of the investment. Keep in mind an investment that sounds too good to be
true probably is.
If you want more information, go the U.
S. Securities and Exchange Commission's web page that gives more tips for investors who want to buy
long-term broker CDs.
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