Personal Finance Q & A

Bank changes CD rules midterm

Q. In 1996, I purchased several certificates of deposit from a bank that has since been taken over by another bank. The CDs have yet to mature, but at the end of 1998, their interest rates were lowered and the time terms were changed. Can the bank do this?

- Confused bank customer, eastern Maine

A. Ask the manager of the bank that now holds your CDs for an explanation of the changes.

"This is a contract issue," says a legal officer with the Federal Reserve in Washington. "A bank CD is actually a contract," he says. "Most people fail to read the fine print for a CD. You need to check the original CD to see if the agreement provided for an amendment procedure, which would allow changes in the terms of the contract."

If such terms were provided, you're "probably stuck," he says. But if the contract did not provide for such changes, you might have a case.

Finally, if a bank changes CD terms for many customers without authority, there could conceivably be a class-action case, the attorney says.

Q. My wife and I are interested in investing in municipal bonds, which have provided good returns lately. But we have been told that we should only buy insured bonds. What does this mean?

- N.J., Los Angeles

A. Insured municipal bonds have a very high "comfort factor" and are for investors who want maximum safety, says Steve Krupa, who heads up insured municipal-bond funds for investment house John Nuveen in Chicago.

Municipalities and public agencies that issue bonds have increasingly turned to bond-insurance companies to provide guarantees for the principal and interest payments on their bonds.

More than half of all currently issued municipal bonds carry insurance, and thus have an AAA rating. The municipality pays for the insurance.

Insured bonds generally carry slightly lower interest rates than bonds that are not insured, because, for the bond holder, they are less risky than bonds without insurance.

According to Mr. Krupa, a number of mutual funds specialize in insured bonds, including five funds offered by Nuveen (800-621-7227).

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com