Banks begin offering flexibility to attract investors back to CDs

Banks are introducing CDs with special features.
DOW JONES NEWSWIRES
NEW YORK -- To attract people to the world of CDs, banks are looking afresh at products that can prevent investors from feeling locked in when interest rates rise.
One such feature, called the bump-up, lets consumers adjust the rate of the certificate of deposit down the road. Another, known as the penalty-free CD, lets people take their money out at least once at no cost.
CDs can provide lackluster returns when rates rise because they come with a predetermined interest rate that doesn't change over the life of the loan.
By introducing some flexibility, the hope is that investors will feel more inclined to invest in CDs regardless of the future rate environment.
Just be aware that you will be giving up some yield to participate, a strategy that hasn't always fared well with CD investors in the past.
Some banks are just launching products with these features, while others are trying to improve upon existing products to attract more assets.
This should result in greater variety of CDs for interested investors, and hopefully, some improvements in the way they operate.
'No Regrets'
Capital One Financial Corp. last year launched a CD with a one-time rate bump it calls "No Regrets" -- a play on the idea that investors win whether rates rise or not.
Los Angeles' Far East National Bank launched what it calls the "Triple Option Time" CD, which offers a one-time penalty-free withdrawal, a one-time rate bump and the ability to deposit additional funds.
Already, one-fifth of the bank's CD customers have chosen this option, said Kenny Hsu, marketing director.
Bank of America Corp., meanwhile, is planning an adjustment of its current bump-up CD, called the Sure Step.
Banks haven't always been successful with their past attempts to rewire CDs into more flexible savings accounts.
Before the bump-up, banks were touting the step-up, which scored poorly, in part, because it automatically adjusted interest payments, which didn't work well when rates were falling.
Today's products have evolved in some ways. But they still retain at least one feature that has been cause for complaint: People have to give up yield to gain flexibility.
What could happen
If you invest in a bump-up or penalty-free CD, prepare to sacrifice an average of 0.2 to 0.5 points of your annual percentage yield, or APY.
So if rates don't rise as you expected -- or you fail to take advantage of the special features for some other reason -- you will make less than you would have with a regular CD of an equal term.
As with all things financial, the trick is careful shopping.
First, try to develop a good understanding of how rates compare. That means knowing the national average rates, information that can be found on Web sites such as www.banxquote.com, a site of a Scarsdale, N.Y., publisher of daily market rates on deposits and loans.
When it comes to CDs with terms of one year or less, consider whether you can nab equal or better yields with a money-market account, which will let you withdraw funds whenever you please.