Rates Current as of Friday February 10, 2012

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Why do longer term CDs pay a higher rate than the short-term CDs?

Many factors affect the rate paid on different maturity CDs. One significant factor is inflation. Inflation expectations generally result in longer interest rates being higher than shorter-term interest rates. Creditors want to be compensated for the use of their funds plus a sufficient return to compensate for the erosion of their purchasing power by inflation. The greater the level of inflation or inflationary expectations, the greater the spread between short term and long-term rates. The interest received on the CD is the return to the creditor or depositor for providing the money to the bank. The longer a bank has contractual use of the funds, the more interest it must pay to attract this type of money from depositors. The longer the term of the CD, the higher the interest rate paid to the depositor.

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