The Advantages of Discover Bank's Long-Term CDs
I have never given much thought about Discover Bank's 10-year CD since a 10-year term seems like an awful long time. However, this blog post at The Irrational Investor brought up a very nice feature of Discover's 10-year CD: an early withdrawal penalty of 9 months simple interest on the amount withdrawn (see Discover's FAQ). Most CDs with terms over 5 years have at least a 12-month early withdrawal penalty. The other nice feature of Discover's 10-year CD is the yield: 3.50% APY as of 8/15/2010. Based on this yield and this early withdrawal penalty, the 10-year CD is actually a better deal than Discover's CDs with terms of 18 months to 60 months.
As that blog post describes, if you need the money at year two, the early withdrawal penalty brings down the 3.50% APY that you have earned during those 2 years to what would effectively have been a 2.25% APY 2-year CD. Discover Bank's current 2-year CD APY is only 1.85%. Similar examples can be shown for terms of 3 to 5 years.
If you don't need the money and if you can't find better rates, you can just leave the CD alone. This provides some protection if we experience what happened in Japan in the 90's when interest rates stayed low for more than a decade.
Another important thing to note is that if you just need a little bit of the money from the CD, you can withdraw interest that has accrued in the CD without penalty.
If 10 years is just too long for you, this strategy also works well for 5-year and 7-year CDs. I reviewed this strategy for Pentagon Federal Credit Union and Ally Bank in this post. Unfortunately, Ally Bank's 5-year CD rate has fallen since that post. I provided updated rates for early withdrawals of Ally Bank's CDs in yesterday's weekly summary. Note, I only approximated the equivalent yields using the formula:
Post Penalty APY = (Full APY) x (D - P) / D
D = days into term when the CD was closed.
P = days of the early withdrawal penalty
If you use this formula for Discover Bank's 10-year CD, you'll notice the post-penalty APYs are a little less than what's listed in that Irrational Investor blog post. That's due to the penalty only being simple interest. As I mentioned, the formula is just intended as a quick estimate of the APY for an early withdrawal.
For more details about Discover Bank, please refer to my Discover Bank CD review. One nice aspect of Discover Bank is that they offer IRA CDs. Also, AAA members can get an extra 5 basis points on all CDs.
Searching for the Best CD Rates
To search for the best nationwide CD rates and the best CD rates in your state, please refer to the CD rates section of DepositAccounts.com.