CDs typically differ from savings accounts because the CD has a specific, fixed term before money can be withdrawn without penalty and generally higher interest rates.
For example, in mid-2004, interest rates were expected to rise, and many banks and credit unions began to offer CDs with a "bump-up" feature.
[citation needed] The Truth in Savings Regulation DD requires that insured CDs state, at the time of account opening, the penalty for early withdrawal.
[citation needed] However, there have been cases in which a credit union modified its early withdrawal penalty and made it retroactive on existing accounts.
[1] The second occurrence happened when Main Street Bank of Texas closed a group of CDs early without full payment of interest.
[2] The penalty for early withdrawal deters depositors from taking advantage of subsequent better investment opportunities during the term of the CD.
In this way, the depositor claims the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.
Jumbo CDs are commonly bought by large institutional investors, such as banks and pension funds, who are interested in low-risk and stable investment options.
These work like conventional certificates of deposit that lock in the principal amount for a set timeframe and are payable upon maturity.
[4] These CDs have a “call” feature which allows the issuer to return the deposit to the investor after a specified period of time, which is usually at least a year.
Institutions often stop using private supplemental insurance when they find that few customers have a high enough balance level to justify the additional cost.
The Certificate of Deposit Account Registry Service program lets investors keep up to $50 million invested in CDs managed through one bank with full FDIC insurance.
The federally required "Truth in Savings" booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase.
Employees of the institution are generally not familiar with this information[citation needed]; only the written document carries legal weight.
For example, during a credit crunch banks are in dire need of funds, and CD interest rate increases may not track inflation.
Author Ric Edelman writes: "You don't make any money in bank accounts (in real economic terms), simply because you're not supposed to.
In general, and similar to other fixed-interest investments, the economic value of a CD rises when market interest rates fall, and vice versa.