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Long-Term CDs Often Pay More Than Short-Term CDs

NYCDoug
  |     |   334 posts since 2011

. . . even if you need to incur an early-withdrawal penalty

https://www.wsj.com/personal-finance/short-term-cds-long-term-investments-6da40236

In many cases, according to new research, investors would be better off choosing longer-term CDs and paying an early-withdrawal fee if they need the money before the CD reaches maturity.

That is because most banks—intentionally or unintentionally—have “internal inconsistencies in their deposit pricing,” meaning that their interest rates on shorter-term CDs yield less than those on a longer-term CD, even with an early-withdrawal penalty, according to study co-author Francis A. Longstaff, a finance professor at UCLA.

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samiam
  |     |   56 posts since 2018
In the example they gave, they compared a one year CD at 1% to a two year CD paying 4%. Today one can easily find a one year CD for 4%, but I highly doubt they can find a 16% two year CD. It’s easy to make a case to go long when using such unrealistic percentage differences.
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