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Is Going Long on CD Rates a Mistake Now?

Sunday, April 18, 2010 - 10:47 AM
Long-term CDs are a mistake according to the opinion in this MarketWatch commentary
Locking in today's most enticing rates means being locked up and out of the better rates later. Missing out on the improvement now is a negative, but because current rates are so low, it's not a huge price to pay for being patient and being better prepared for rate changes ahead.
The article mentioned reward checking as a good alternative. However, a commenter noted other issues to consider such as balance caps of reward checking and early withdrawal penalties of CDs:
Depending on the penalty for early withdrawal, CDs are still a viable capital preservation tool in the face of rising interest rates and inflation.
It may seem likely that rates will rise in the next couple of years, but there's no guarantee. That's one reason for CD ladders.
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Ken TuminKen Tumin5,469 posts since
Nov 29, 2009
Rep Points: 125,077
1. Monday, April 19, 2010 - 4:05 PM
Am I missing something about long term CD rates of 3.5% or so?  Assuming a typical 6 months early termination penalty, wouldn't breaking it after (for example) 2 years, still give a higher total return than investing in a 24 month CD?  According to my rough math, a $10000 CD would earn 18 months interest at 3.5%, or, approximately $525.  A 24 month certificate held to maturity at 2% would earn about $400.  Keeping it longer than 24 months only improves the advantage, and, in addition, if rates stay low for the full term, you'd be earning a highly competitive rate for 5 years.
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AnonymousAnonymous2,282 posts since
May 9, 2010
Rep Points: 3,924
2. Monday, April 19, 2010 - 5:06 PM
Based on your breakdown of net interest earned even after an early withdrawal penalty, we should all put our money into a very long term CD and then cash it out before maturity whenever we feel that a better deal can be had elsewhere later.  This makes sense and provides some flexibility.  When rates rise, you can close it out and sell like a corporate bond. If rates stay down, then you hold until maturity (also like a corporate bond).  There would be some factors that negate taking this type of course of action with your funds - if you needed the money on very short notice often, you would incur penalties or the bank might refuse to close out your account.
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AnonymousAnonymous2,282 posts since
May 9, 2010
Rep Points: 3,924
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