rizzleness said:I have a question thats kind of related.
Why should one put their money on a CD and lock it up when they can just put it in banks with higher savings accounts. For example: E-savings account with citibank offers 5% APY and 4.88% monthly interest. Am I doing the math right here?

Because that savings account might be paying 3% next year, while the CD keeps earning 6%. The objective is to lock in long-term rates when they are high, to not be affected when rates drop again.

So IF i took out a BT for all 9k and placed it in a CD that yielded 5% APY and 4.88 monthly interest then does that really mean I get
4.88% of 9000 = $439.2 per month????

The 4.88% is your APR (annual percentage rate) and not monthly interest. It assumes daily compounding. After a year, if you reinvest interest in the CD, you'd have 5.00%*9000 = $450. Per month you'd have 9000*((1+0.0488/365)^30 -1) = $36.17, i.e. roughly 1/12 of the annual interest.

mariojm said:rizzleness said:I have a question thats kind of related.
Why should one put their money on a CD and lock it up when they can just put it in banks with higher savings accounts. For example: E-savings account with citibank offers 5% APY and 4.88% monthly interest. Am I doing the math right here?

Because that savings account might be paying 3% next year, while the CD keeps earning 6%. The objective is to lock in long-term rates when they are high, to not be affected when rates drop again.

So IF i took out a BT for all 9k and placed it in a CD that yielded 5% APY and 4.88 monthly interest then does that really mean I get
4.88% of 9000 = $439.2 per month????

The 4.88% is your APR (annual percentage yield) and not monthly interest. It assumes daily compounding. After a year, if you reinvest interest in the CD, you'd have 5.00%*9000 = $450. Per month you'd have 9000*((1+0.0488/365)^30 -1) = $36.17, i.e. roughly 1/12 of the annual interest.

Firstly thank you very much for clearing that up. I was not aware that the interest was compounded. This makes more sense now. Thanks to mst3k also for their response. I guess you live and learn, It makes more sense that CD's are a better investment for the long run. However, I am a student and need more accessibility to whatever little cash I have so I think it might be best for me to invest in either a 3month to 6 month CD or just stick to savings until I have better cash flow. Thank you both once again.

mariojm said:
Calm down, it's the CD discussion thread and we're all here to share our wisdom.

I am perfectly calm, thanks for your concern. Please try to stay on topic.


I don't share the sentiment that one should stick to savings accounts because they don't understand CDs. They may end up making only half the interest next year because of poor planning. Rather, I think they should learn about CDs and their other choices.

Reread what I bolded. This is exactly what I said. They should not invest in CDs and tie up their money while they don't understand the terms and think they get 4.88% per month. If you think they should lock up their money in a 2.0% APY, 10 year CD because they think they get 2.0% per month then you are doing the OP a disservice. 2% per month is a fabulous return and if the OP did not understand this is not the return they could easily get suckered into such a deal. Once they "learn about CDs" then they should invest in CDs if it makes sense for them. Disagreeing with understanding an investment before investing in it is very dangerous advice.

If you weren't so busy chastising me you would have seen that I gave the same advice as you did.

I never said they should not invest because they don't understand CDs. I said they should not invest UNTIL they understand CDs.

mariojm said:mst3k, thank you for your response, I have corrected my wording on APR. Sorry that I had to go off topic to bring you back on topic. Sorry if you felt chastized, but I felt that you would have served the poster and future readers better by giving the poster a detailed explanation of their mistakes rather than belaboring the gravity of their mistakes and stating you're too tired to correct them. It seems like we have a different approach to giving advice. I think it suffices to say that the poster was confused about interest calculation for both savings accounts and CDs, therefore sticking to savings accounts while not understanding CDs is just as bad an option as opening a CD based on the wrong assumption; also I reiterate that I believe CD rates are peaking and may drop next year, therefore it may be a good idea to act on them sooner rather than later, if at all; and if I didn't make it clear, by that I meant proactively learning about them sooner rather than later, before investing in them.

I'll guess we'll have to agree to disagree then. If the OP has their money in a savings account and then goes and learns about savings, CD, stocks and anything else they will be "safe". If they commit all of their money to a 5 year CD because they do not understand the terms they could face serious penalties if they need the money later after they have learned. So no, I absolutely diagree that it is "just as bad" to keep your money in savings while you learn about CDs tonight rather put it all in a CD and then go learn about CDs and savings accounts.

For the record you did not have to go off topic to bring me back on topic despite you saying you had to. That was your choice and the OP thanked me for my post and that would have been the end of it, you were the one who dragged us into this off-topic pit and misinterpreted what I said.

I'm sorry you felt that I said the OP should not invest in CDs. I never did.

mariojm said:tooshy said:Hold off locking in rates til September, according to a Penfed branch manager whom I spoke with today, rates are likely to go back up to 6% next month. Nothing is for sure, but I think it is worth a week's wait to find out.

Thanks for this great info, tooshy. Do you know if they are basing this on market outlook (i.e. they suspect perhaps that interest rates will keep going up later this year) or they are just planning a special? In general it appears as if longer CD rates have been dropping recently.No I don't have any insight...except I ditto what SeattleNative said. My observation these past few years is Penfed likes to jump the gun. If rates are on their way up (in general) they like to offer very good rates ahead of everyone else, then after a few months (when their deposit levels rise perhaps) they cut back irrespective of the prevailing rate environment. Seems their own internal supply and demand and general rate direction have dictated their rate offers before.

OT but I hate to stake my reputation (j/k) on wild claims and hope she's not jiving. She seemed serious enough to say call her (hands her card) to make the CD next month (re: IRA transfer).

Read this in the paper yesterday and don't get callable CDs. I see a bunch offered in my area lateley and rates are not really any better than standard CDs. If rates rise your stuck with the CD and if rates fall the bank takes it back. Seems all in the banks favor and wondered why anyone would ever do one?

Buying a callable CD? The longer the maturity, the greater the risk
By Humberto Cruz | September 13, 2006

A few of you have told me I did a disservice to readers by failing to discuss callable certificates of deposit, including their pitfalls, in a recent column mentioning brokerage CDs.

I actually left out not only callable CDs but other types, including (this is just a partial list) multistep, inflation-adjusted, zero-coupon, and equity-linked CDs. I discussed only the traditional fixed-rate, fixed-term certificates of deposit that pay a set rate of interest for the life of the CD.

My excuse: I ran out of room, and the more common fixed-rate CDs are enough to meet the needs of most if not all CD investors. But callable CDs and other types merit discussion so investors are aware of their pros and cons.

Brokerage CDs, although sold by brokers, are bank-issued products with the same Federal Deposit Insurance Corporation protection as those sold directly by banks. They often pay higher interest rates than bank-sold CDs and don't impose early-withdrawal penalties. Rather, you normally can sell these CDs before maturity through your broker.

As a rule, you'll find the highest advertised rates from callable brokerage CDs (for example, annual percentage yields of 6 percent or more on 10-year callable CDs). But there is a catch.

Simply put, a callable CD is one that the bank can ``call" or redeem before maturity, sometimes as early as six months after you buy it, and every six months thereafter. When a CD is called, you get your principal back, plus any accrued interest.

You, on the other hand, have no right to redeem the CD before maturity, although you could try to sell it.

``A callable CD can work against you whether rates rise or fall," said Greg McBride, senior financial analyst for Bankrate.com. If rates fall, the bank could call the CD, leaving you to reinvest the returned principal at lower rates. If rates rise, you can get stuck for years holding a CD that's suddenly paying below-market rates.

In that case, if you try to sell the CD before maturity, you'll probably suffer a significant principal loss. (Prices of CDs move in the opposite direction of interest rates and, in broker jargon, there is ``limited liquidity" for them in the ``secondary market." Translation: You won't find many takers for the CD you want to unload, and you won't get a very good price.)

Callable CDs do have an initial ``noncallable period" when they cannot be redeemed. During that time, they will probably pay you a higher interest rate than you can get from traditional fixed-rate CDs. The longer the noncallable period is -- the longest I've seen is two years -- the more attractive a callable CD can be.

Another plus is if the interest paid by the callable CD is high enough to meet your needs until the stated maturity. Then, even if rates rise after you buy it, you are still getting a payout that covers your needs.

The standard advice, and it's good, is for most investors, and particularly seniors, to stay away from callable CDs with very long maturities, such as longer than 10 years. For one thing, you probably don't want to tie up your money that long. And because of the way the math works with CD prices and interest rates, the longer the maturity, the greater the risk of a sizable loss if you have to sell.

One type of callable CD, the ``multistep," changes rates at scheduled times. For example, a 10-year ``step-up" callable CD I saw advertised recently paid 5.5 percent the first two years, 6.5 percent on years three through six, and 7.5 percent the last four years, for an overall annual percentage yield of 6.7 percent.

But the problem, and the reason I don't like these CDs, is that the bank typically can call them before any rate increase ever occurs.

Inflation-adjusted CDs pay a lower initial rate that is adjusted periodically for inflation. ``Zero-coupon" or ``growth" CDs are long-term certificates that pay all interest at maturity.

Equity-linked CDs pay rates ``based on" (which doesn't mean the same as) stock market gains. Since details can vary widely, my suggestion is never to buy one, unless you understand precisely how it works.

Humberto Cruz is a columnist for the South Florida Sun-Sentinel.



© Copyright 2006 The New York Times Company

Kinda looks like the party is over for 6% CD's. A week or so ago I looked around and saw 2, 3, 4 ,and 5 year 6% or even a little higher, I thought. Today I see the only one left is the DCU 16 month.
I think I'll start locking in longer terms over the next few months.I want to set up a CD ladder with 1,2,3,4,and 5 year terms.
I think this next year is when a CD ladder may make sense. Rates are no longer rising.

World Savings has replaced its in-branch 8-month 5.61% APY (old money) CD with an in-branch "competition-crushing" 5-month 5.56% (old money) CD just one week before one of my World CDs matures. I had planned to roll it into the 8-month, but now I'll look elsewhere, maybe E-Loan or La Jolla Bank's 12-month 5.75% APY CD.

Remember, YMMV by branch location. This World in-branch rate is SoCal and may be more (or less) elsewhere.

ThursdaysChild said:tooshy said:Hold off locking in rates til September, according to a Penfed branch manager whom I spoke with today, rates are likely to go back up to 6% next month. Nothing is for sure, but I think it is worth a week's wait to find out.Thanks for the tip, tooshy. I hope you were able to get in on this. I managed to get a membership and a certificate before the rates went back down September 28th. Let us know the next time you hear from your nice branch manager!Yes I did get in three CDs at 5yr terms (vs. 3yr since I've got too many CDs maturing in 2009). I understand the ladder concept but w/enough float money from 0% no fee BT offers (got another one from AT&T Universal (no rewards) card this week), I think I should have been more aggressive and plopped most of our Presidential savings in CDs. If rates do tread downward, we will again see more float money as well. I predict that lower rates mean more "arbitrage" opportunities so net-net we'll do just as well. I'm going to be more aggressive the next time Penfed offers their 6% CDs, hopefully in January-February again (this is just *my* guess, not any official word from Penfed).

YVW ThursdaysChild

Please disregard my ladder remark....not sure why I said that.

asdf9876 said:tooshy said: If rates do tread downward, we will again see more float money as well. I predict that lower rates mean more "arbitrage" opportunities so net-net we'll do just as well.

I'm certainly not seeing 60 cents on the dollar in float money since ED was a rate leader at 3% until now. I'm seeing just as much now. I think 0% is more a marketing tool then it is tied to economic interest rate climate. All that it means when interest rates go up is that people who screw up and don't/can't pay off when the 0% is over are now paying 20% rates instead of 15% rates. Whether the Fed is 1% and people are paying 15% interest or the Fed is 5% and people are paying 20% interest the CCs still win and I think they will continue the 0% teaser rate.

Or to say it another way....if ED/ING/ELoan/GMAC/HSBC etc all simulatanously dropped their interest rates to 2.5% tomorrow, I very much doubt Chase/Citi are going to call me up and offer me double credit limits.Not sure what you're saying, you don't see more float money today?

Maybe I'm wrong, but I'm assuming banks can afford more teaser rate promotions when their borrowing costs are lowered as well. Maybe 5% gas/grocery will return as well. When rates were much higher in the 90s, I certainly didn't see any 0% no fee offers.