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Thread: Certificates of Deposit

  1. #1
    Moderator charlie61's Avatar
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    Default Certificates of Deposit

    If there's another thread specifically dedicated to CD's, feel free to send me there...

    I'm considering buying some CD's, and I don't really know where to start. I use Fidelity, and I'm looking at the CD list....

    The money I will spend on these CD's is completely free cash for me (I don't need it for anything), so I can wait any time period. I'm guessing this will change the options open to me.

    My general questions: What is...

    1) Expected yield: do I just choose whichever CD has the highest number? Some of them say 2.3 and such...which is making me question my understanding of expected yield.

    2) What is coupon frequency? Is this like a dividend?

    3) Does it matter which bank I buy it from? Some of the banks look shady, despite being FDIC insured. Are they all legitimate?

    I genuinely want to thank you all in advance for any responses. Melonie and a few other consistent DD posters (you know who you are!) provide such incredible, down-to-earth, invaluable advice on this forum. You guys are awesome!

    ETA: Also, I tend to think of CD's as basically free money that many people just don't take the time to consider. Is this incorrect? As long as a CD is FDIC insured, and you don't need the money for something else, is it a risk-free investment?
    Last edited by charlie61; 04-08-2009 at 03:28 PM. Reason: ETA

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    Default Re: Certificates of Deposit

    i pmed you

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    Default Re: Certificates of Deposit

    a few more answers to your questions...

    1- not necessarily. it's important to look at the amount of time that cd will be locked in. do you want it for 6 months? 5 years? i would start with a 1 yr, since you are new to this, just in case. interest is usually compounded quarterly.
    2- could you send me a link in regards to a bank that posts coupon frequency?
    3- i would bank in person not online, esp when opening a cd. if the bank doesnt have that option, i honestly wouldnt trust it but i'm old school. it does matter what bank, since some banks are in financial trouble right now so i would do a search on that first. some banks also dont have as good a cd rates as others.

    a cd is risk free up to $100k if fdic insured (temporarily $250k, but that will end by dec 08 i believe). make sure you read what you sign carefully!!!

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    Moderator charlie61's Avatar
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    Default Re: Certificates of Deposit

    ^ I can't send you a link since it's through fidelity.com (you have to be a member to access the page).

    Thanks for your helpful PM!

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    Default Re: Certificates of Deposit

    Here is a site you may find useful...

    BankRate.com

    http://www.bankrate.com/gookeyword/r...osits_home.asp

    You can compare the rate offerings of different institutions.


    CD's are a relatively low risk investment, part of why they offer such low yields.

    They tend to offer a bit higher yield the money market accounts or savings accounts because you give up the flexibility of having access and use of your money. In some cases you can get it if you need it, but would have to pay a penalty.

    Things to keep in mind is the duration of the CD and also the min. balance required. Some financial institutions quote higher rates on their CD's but only for large balance depositors.

    Before you decide on a CD, I would suggest that you do look and compare some of the money market accounts. ETrade and ING Orange are known for having very competitive money market accounts, sometimes better than many CD's offered by banks, without giving up the flexibility of access to your funds.

    For example ING Direct is offering 1.50% on their savings account with no minimum balance and no fees! This should be your base line of comparison to any CD or money market account you look at.

    Here is their site.
    http://home.ingdirect.com/index.html

    So long as the institution is FDIC insured you should be fine, but feel free to ask about the specific institution and we can give you some feedback. Admittedly, some of the best CD rates are being offered by banks and institutions that are in desperate need to attract cash deposits to help strengthen their balance sheets, so you can take advantage of their need.


    Best of luck!
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: Certificates of Deposit

    ... oh one other thing to note is the difference between the stated rate and the APY has to do with the bank's compounding method. The shorter the better, so daily is better than monthly which better than quarterly, and so on and so forth. If you see simple interest, then forget it, since you are not getting any compounding. (You can tell if the CD is simple interest if the stated rate and APY are equal to each other.)
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: Certificates of Deposit

    Bump! Where are the other crazy-smart DD ladies/gents?

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    Default Re: Certificates of Deposit

    Here's some more info ...

    - there are really two different types of CD's. The first are 'securities', which are governed by the SEC and insured by the SIPC. The second are 'deposits', which are insured by the FDIC (or NCUA in the case of credit unions). In this era of 'shaky' financial institutions, I would stay away from the former since they are only insured against fraud by the SIPC not loss of principal.

    - of the 'deposit' CD's, there are some banks that are sticklers about loss of interest and penalty charges if the need for early withdrawl should arise. On the other hand, some banks (and credit unions) do not rigidly enforce early withdrawl penalties

    - even the 'deposit' CD's that are insured by the FDIC / NCUA against loss of principal are not immune to loss of 'purchasing power' ... i.e. if and when the rate of US dollar inflation exceeds the after-tax interest rate earned by the CD. The longer the term of the CD, the higher the risk of 'purchasing power' loss.

    - it's easy to purchase CD's that are denominated in other currencies besides the US dollar. One of my recent favorites has been the Swiss Franc CD that pays 0% interest but which has yielded a fat APY over the past three months as the Swiss Franc has become more 'valuable' versus the US dollar. See

    RTTNews) - The US dollar edged sharply lower against the euro and the Swiss franc in early New York deals on Wednesday. The greenback reached a 5-day low of 1.1628 against the Swiss franc and a 2-day low of 1.2998 against the euro by 9:30 am ET. The buck that was worth 1.1679 against the franc and 1.2946 versus the euro at Tuesday's close is currently worth 1.1642 and 1.298, respectively.

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    Default Re: Certificates of Deposit

    Quote Originally Posted by Melonie View Post
    ...
    - it's easy to purchase CD's that are denominated in other currencies besides the US dollar.
    Melonie, respectfully, does this not get into currency speculation that may not fit the original intent of realizing a low risk rate of return?
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: Certificates of Deposit

    Well there is certainly a currency risk present. However, merely letting US dollars 'sit' in any account which bears an extremely low interest rate (and an even lower interest rate after taxes) clearly risks a loss of 'purchasing power'. Given that gasoline / oil / food / every other commodity is really priced internationally ( meaning that every time the US dollar goes down the prices of all these items go up), and given that the FED is now printing up something like 8 billion new dollar out of thin air every week, a taxable CD that is going to pay back 1020 dollars a year from now on a 1000 dollar deposit ( 1013 dollars after tax ) seems pretty 'risky'.

    I had read the poster's original intent to be seeking a stable long term investment with no particular expectations regarding rate of return. As the global economy revolves less and less around the US dollar, ANY US dollar denominated invesment is becoming more risky in terms of 'purchasing power' loss. Of all of the world's currencies, the Swiss Franc with it's partial gold backing is about as stable a currency as you are likely to find right now.

    ~
    Last edited by Melonie; 04-23-2009 at 03:19 AM.

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    Default Re: Certificates of Deposit

    Okay, I certainly agree with you that the nominal low risk return available on CD's could be outpaced by inflation.

    So, if the goal is to protect "purchasing power" rather than just getting a return, would you advise her to look into TIPS?
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: Certificates of Deposit

    So, if the goal is to protect "purchasing power" rather than just getting a return, would you advise her to look into TIPS?
    I would if the TIPS interest rate was actually based on the true US 'price inflation' rate. Unfortunately it is based on the gov'ts 'official' inflation rate index ... which may or may not correlate with what's actually happening in regard to US dollar 'purchasing power'. TIPS also have some federal income tax drawbacks i.e. having to pay income tax on annual inflation adjustments to the principal, even though you can't actually lay your hands on any of that money until the TIPS bonds mature ( = time value of money losses on taxes that must be paid now based on income that will only occur many years down the road). IMHO TIPS are a 'sucker play' investment because the 'fine print' doesn't allow them to really perform as advertised.

    If you really want a US dollar denominated investment that is 'guaranteed' to keep pace with inflation, there are a few specialty mutual funds out there as shown at to choose from. At least these don't treat long term capital gain income as fully taxed 'ordinary' income as TIPS do !

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