A certificate of deposit (CD) that allows the holder (depositor) to lock in an interest rate for a specific number of months, while also having the potential to earn a higher rate of return later on. Over the lifespan of the CD, the interest rate will step up, at least one time, and usually several times.However, early withdrawal of funds is subject to a penalty, i.e., the holder will pay a price for withdrawal before it maturity date.
Step-up certificates of deposit are sometimes known as bump-up certificates of deposit. However, in practice, the two differ considerably. Bump-up certificates of deposit give account holders the option to bump up, or increase, their annual percentage yield (APY) at least once before maturity. Examples include certificates maturing in 3, 4, or 5 years, each associated with a one-time rate increase/ bump-up. On the other hand, step-up certificates have pre-set rate increases that automatically sets in at specific points in time.
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