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What is the difference between a fixed and a variable interest rate on a CD?

Curious about Higher interest rate

What is the difference between a fixed and a variable interest rate on a CD?

The main difference between a fixed and a variable interest rate on a Certificate of Deposit (CD) lies in how the interest rate behaves over the CD's term:

1. Fixed Interest Rate CD:
Stability: A fixed interest rate CD offers a set interest rate that remains constant throughout the entire term of the CD. This means that the rate is locked in when you open the CD and will not change until it matures.
Predictability: With a fixed rate CD, you can predict exactly how much interest you will earn over the CD's term, providing a high level of predictability and security.
Lower Risk: Fixed rate CDs are lower risk because your returns are guaranteed, regardless of market fluctuations.

2. Variable Interest Rate CD:
Fluctuation: A variable interest rate CD, also known as an adjustablerate CD, has an interest rate that can change during the CD's term. These rate changes are typically tied to an external benchmark, such as the Prime Rate or the Treasury Bill rate.
Potential for Higher Returns: Variable rate CDs have the potential for higher returns if the benchmark rate increases over time. However, they also come with the risk of lower returns if the benchmark rate decreases.
Uncertainty: The interest you earn on a variable rate CD can vary, making it less predictable than a fixed rate CD.

It's essential to carefully consider your financial goals and risk tolerance when choosing between fixed and variable rate CDs. Fixed rate CDs provide stability and predictability but may offer lower returns in a rising rate environment. Variable rate CDs have the potential for higher returns but come with the uncertainty of rate fluctuations. Your choice should align with your financial objectives and your comfort level with interest rate risk.

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