contrails

I have an online certificate of deposit that is nearing its end. So, in the mail I got an information sheet from the online bank advertising the latest rates and term lengths that I can put this money into when this one runs out.

Here they are:

Rollover term / Rate
6 month / 3.3%
9 month / 3.3%
12 month / 3.3%
18 month / 3.0%
24 month / 3.0%
30 month / 3.2%
36 month / 3.3%
48 month / 3.5%
60 month / 4.0%

My question is, why to the rates decrease before they increase as the length of term gets longer?

My initial thinking would be, if they want to lock in having my money for 24 months instead of 6 months, that rate would need to be higher to give me, the customer, more incentive to do it. Yet the 6 month rate is higher than the 18, 24, and 30 month rate. Why is that?

And while I'm typing, what one would you do. Given: the amount of money in this CD that is about to run out is not an amount I would need in the next few years.

vagabond

I have no logical explanation for why there is a dip in the rates between the 18 month and 24 month period. However, the percentage difference is de minimis, unless your principal is of epic and biblical proportions. My own bank does not do that, as far as I know. A lesson I learned long ago when I was a young lass was not to leave money in a CD for more than 3 years at a time. A lot can happen in the meantime and you may need the money after all.

Careercfi

Old finance guy speaking out his butt here - but consider this:

CD's are compared to the "regular investment market" a very low risk - medium yield investment. The goal is to speculate and reinvest this money so it makes more money than they have to pay you. Much more...
Most of the time it does.

When you are looking at a teaser like the 6/9/12 month vehicle you are getting the same bang for your buck as by investing it over 3 Years.

The art with CD's is to see how the economy plays it's part in them. Relatively safe money - low risk investments - I locked in a few grand at almost 6% last year. Find a way to balance your CD portfolio so CD's mature and get eligible for re investment. If there is the slightest chance that you may need to access the money don't tie it up. You can have a CD mature every 3 months, it will keep you busy and you need to know how you are doing financially. If, like you mentioned you can guarantee yourself not needing the money - you could lock it in, but everytime you do so you limit your chances of taking the profits from miracoulously increased interest. Imagine you locking 20000 into a 60 month CD @ 4% and 7 months down the road Capital One gives you 5.4 for daily money again? Sucks!
I advise CD's only if the overall financial condition allows for joking around with it. There are more tax effective vehicles that can net you more than the lousy 4%, without tying up the money.

The banks figure the consumers confidence into the system - therfore giving you a teaser to sign something up. Many many million people in this country could not and would not lock in 100 dollars if they got 100% interest, because the term may put them upside down financially. If they get you to commit 1000 for 6 months (thats better than nothing for 60) they gladly take the mass accumulated this way and reinvest it for even bigger profits.

Americans are lousy savers - but great spenders. If you walk into a bank at age 40 and don't at least owe more than you can work back in the next 20 years they look at you like a alien just walked through the door. The fun starts when people cashed in on a HELC for 2% and turned around investing the same money paying it off by interest from CD's.


60/4 is a joke in my opinion, it reflects a very weak market.
Might as well be the best interest we see for a while... so your mileage may vary and should be subject to a financial advisor.

JMT21

Ask your financial adviser about a money market account. MMA's are a cross between a checking account and mutual fund. Most offer similar rates to CD's, but are more liquid. Try these for more info:

Money market deposit account - Wikipedia, the free encyclopedia

Money Market vs. Certificate of Deposit

Typhoonpilot

.....or if you want to be innovative look at Chinese Yuan funds. Everbank offers them and it has been appreciating at just under 1% per month. They also offer foreign currency CDs. If you want to bet that the USD is going lower these can be quite good. I just came out of an Australian Dollar 3 month CD that yielded 5.5%. I made an annualized 12% because of the currency appreciation. Of course I could have lost as well, but my intuition was correct. I'm staying in the Chinese Yuan because my gut feeling is the Chinese will let the currency rise faster post Olympics.


Typhoonpilot

beechbum

Basically when you see rates such as these, the economy is expected to get worse before it gets better. It is called a negative yield curve. It is relatively uncommon, although we have been seeing rates like this for a little over a year now (not withstanding teaser rates). Here is a link to read more about the yield curve: Negative yield curve — Understanding yield curve

On another note, inflation is going to eat you alive if you stick with CDs. We currently have the highest inflation we have seen in 27 years.

vagabond

Typhoonpilot, I am hitching my wagon to your horse! I sold some of my beloved Berkshire Hathaway stock and am looking for another investment vehicle. Went to the Everbank website and looked at the Foreign Currency CDs of which you speak. The Chinese Yuan CD is available only as an "Access Deposit Account." And when you look at the APY, it says 0% no matter how much your balance is. The South African Rand one pays 3.25%, but you need 450,000 rands. 450,000 anything is a lot.

Which one were you talking about?

Typhoonpilot

I'm in the Chinese Yuan account. True there is no interest on that one, but the currency is appreciating at the rate of around 10%/year.

I did the Australian Dollar CD for three months then came out of it. That was good, but I'd be hesitant to go in at the current level. I also looked at the Rand, but when I did the country was having it's power blackouts and the currency was depreciating. I'm most comfortable with the Yuan right now as it is my belief it will continue to appreciate slowly but surely.


Typhoonpilot