Individuals who wish to invest their money in a relatively low-risk way are well advised to investigate certificates of deposits, commonly known as CDs. Investors can purchase CDs through banks, credit unions, or brokerage firms. They then have the option of choosing either a variable or fixed rate CD.

Here’s how CDs work: the investor agrees to deposit a specified amount of money in a financial institution for a fixed amount of time. In return, the institution offers the investor a higher interest rate than normal. The interest is either paid out as it accrues or added to the principle. The downside is that the investor must also agree to not withdraw any money from the CD until it reaches maturity (the financial term for its expiration date). Typically, CDs last anywhere from three months to six years, with longer-term CDs yielding higher interest rates.

In the past CDs were always offered with fixed interest rates. This meant that no matter what the economic climate is, the interest rate on the CD remained the same. The catch to this was that if interest rates went up, the investor could potentially miss out on higher profit yield due to the fixed rate. In response, banks began to offer variable interest rates to investors.

Variable interest rates are calculated by a number of mediums, scubas the consumer prime index or market index. Should interest rates go up, the interest on the CD will increase substantially, especially if the principle sum is quite high. However, should the interest rate plummet, the investor may end up making less than would have had they chosen a fixed rate. In order to sweeten the unpredictable nature of variable CDs, banks tend to offer higher interest rates on than traditional fixed rate CDs.

Choosing a variable interest rate as opposed to a fixed one will up the risk factor of the CD, but will also increase overall profit should interest rates rise. Investors who are willing to take the risk should ask their financial institution about variable interest rate CDs.