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How do I earn interest on an index-linked Certificate of Deposit (CD)?

It depends on how the CD is structured.

The interest on an index-linked CD is tied to an index—such as the S&P 500 or the Russell 2000—selected by the bank. Depending upon how the CD is structured, you could earn interest based on specified changes in the linked index. For example:

  • Some CDs pay interest based on an increase in an index; some pay interest based on a decrease in an index.
  • Some CDs pay interest if an index stays within a certain range, but pay no interest if the index moves out of that range.
  • Some CDs look at average changes in the index quarterly or annually during the term of the CD. This may produce a different result than a formula that focuses upon index results as of specific dates (e.g., 3/31 or 12/31).

Additionally, the interest on the CD may be subject to an interest cap or a participation rate. A participation rate determines how much of the index's change will be used to compute the interest. For example, if the index goes up 10 percent and the participation rate is 80 percent, then the investor will receive 8 percent interest over the term of the CD. If the index goes down, the investor could earn zero percent interest over the term of the CD. An interest cap sets a limit on the percentage of growth the CD can earn. For example, suppose the S&P 500 goes up 20 percent and the CD participation rate is 70 percent, but the interest cap is 10 percent. The investor's return will not be 14 percent (70 percent of 20 percent), but instead will be capped at 10 percent. Customers should look at Annual Percentage Yield (APY) disclosures when comparing products.

Last Reviewed: October 2020

Please note: The terms "bank" and "banks" used in these answers generally refer to national banks, federal savings associations, and federal branches or agencies of foreign banking organizations that are regulated by the Office of the Comptroller of the Currency (OCC). Find out if the OCC regulates your bank. Information provided on HelpWithMyBank.gov should not be construed as legal advice or a legal opinion of the OCC.

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