Fee-free transactions
The term "no-penalty CD" is sometimes substituted for bump-up or liquid CDs.

In the case of a bump-up CD, it would mean a customer could move to the higher interest rate CD without penalty, where, without that option, a customer might have to cash the CD, take the early-withdrawal penalty and buy a new CD at a higher rate.

When liquid CDs are referred to as no-penalty CDs, it simply means the ability to make a withdrawal without penalty.

While customers like the flexibility of these CDs, financial institutions like having the ability to offer CDs at less than the best market rate, at least at the outset of the term.

Banking industry analyst Todd Davenport of SNL Securities says flexible CD products are one way banks can balance assets and liabilities during times of rapidly fluctuating interest rates.

"Banks have asset liability committees. Those committees try to make sure that the loans they make and the maturities on those loans are matched up with maturities on deposits. Messing it up can cost the bank a lot of money. Anything that offers a little bit of flexibility is helpful."

While many of the larger financial institutions offer flexible CDs, you may find a wider variety of options at smaller banks. Call it the "we try harder" attitude.

"The smaller banks don't have a lot of the hedges available to large banks," says Davenport. "They can't swap pools of assets, they don't have the size and diversity to smooth out matching assets and funding, so they may need to be a bit more creative in the products they offer."

The next time you're considering a CD, compare the different features offered by financial institutions in your area. You may find it's worthwhile to take a slightly lower interest rate in exchange for greater flexibility.