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CD Rates / Terms / penalties
Old 05-30-2011, 02:16 PM   #1
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CD Rates / Terms / penalties

I'm looking to park some cash that I might need in the next 2 yrs. Won't need it for sure for at least 18 months, but maybe after that.

I was looking at Ally CD rates. 1yr rate is 1.19, but 5yr rate is 2.36. All their CDs have a 60 day interest penalty if redeemed prior to maturity.

My question is why wouldn't I take out a 5yr and pay the penalty if I need the monies before maturity. 60 days interest on the 5 yr CD looks like about .39 % (2.36 / 6).

That indicates that if I redeemed the CD after the first 12mos, I'd still earn 1.97% (2.36 - .39) which is significantly better than the current 1yr rate.

What am I missing here??

Thanks
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Old 05-30-2011, 05:06 PM   #2
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You are missing nothing. I reasoned the samething about a year ago and got a rate of 2.99% on the 5 year.

As an aside, I've been very pleased with the customer service at Ally.
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Old 05-30-2011, 05:20 PM   #3
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That is also my understanding of how it works and I confirmed it with an Ally rep on the phone (which of course you should also do before investing based on internet rumors). I don't understand why this isn't taking a great deal of CD money from other banks with higher penalties.
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Old 05-31-2011, 11:08 PM   #4
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hmmmmm.... very good point. I shall look into this myself. Thanks.
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Old 06-01-2011, 06:57 PM   #5
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I have a CD expiring soon. I like your idea.
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Old 06-01-2011, 07:12 PM   #6
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I have a CD expiring soon. I like your idea.
So do I. Anyone know of anything wrong w/ the pay the 2 months interest fee for early withdrawal? Sounds pretty straightforward and a no-brainer. Beats short term CD rates and what MMA are providing.
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Old 06-01-2011, 08:35 PM   #7
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check out ibonds, currently paying 4.6%
you can buy up to 10k per SS number.
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Old 06-02-2011, 06:08 AM   #8
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where do I look for the ibonds?
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Old 06-02-2011, 06:39 AM   #9
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where do I look for the ibonds?
It's a savings bond by Treasury Dept. Individual - I Savings Bonds Rates & Terms
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Old 06-02-2011, 06:46 AM   #10
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check out ibonds, currently paying 4.6%
you can buy up to 10k per SS number.
Just remember the 'Fixed Rate' on those bonds is zero. That 4.6% reflects an annualized six month inflation factor of 2.3%, which will likely be reset lower this October. Don't expect to clip 4.6% annually unless that is the rate of inflation. 5-yr TIPS break-evens are 2.09%, which is what you should expect to earn on these bonds.

Having said that, ibonds are a good deal compared to short-term TIPS, treasuries and even corporates that all have negative real yields right now.
Although the purchase limit makes them practically worthless as a part of any kind of real accumulation strategy.
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Old 06-02-2011, 06:59 AM   #11
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So do I. Anyone know of anything wrong w/ the pay the 2 months interest fee for early withdrawal? Sounds pretty straightforward and a no-brainer. Beats short term CD rates and what MMA are providing.
I can see one hole in the idea. If you read the fine print of most CDs, you will see that banks typically reserve the right to deny early withdrawal requests. I don't imagine that happens much, but it would not be a total shock to hear that it started to happen if tons of depositors started asking to redeem early.
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Old 06-02-2011, 10:06 AM   #12
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I can see one hole in the idea. If you read the fine print of most CDs, you will see that banks typically reserve the right to deny early withdrawal requests. I don't imagine that happens much, but it would not be a total shock to hear that it started to happen if tons of depositors started asking to redeem early.
That's exactly what I read in the USAA website today. I sent them a message to investigate - I wonder how often they've denied early withdrawals.
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Old 06-02-2011, 10:15 AM   #13
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That's exactly what I read in the USAA website today. I sent them a message to investigate - I wonder how often they've denied early withdrawals.

FWIW, I decided that for a certain portion of my fixed income exposure I am happy to sit in a ladder of CDs and while I choose providers that don't beat me up with big early withdrawal fees it would take a big rate move to make me really do anything. So I have a ladder (missing a few rungs) that goes from Jan. 2014 through Jan. 2021. I will fill in the missing rungs and then just roll over CDs as they come due.
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Old 06-02-2011, 10:29 AM   #14
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Just as an FYI....

I have worked at banks and in fact one that failed twice... they do not deny smaller deposits taking their money out even if a penalty... you have to be a BIG depositor to have this fine print affect you... I would say many millions of dollars...

Cash flow in and out of banks is a lot more than you might realize... but the average is pretty consistent... (your money goes out, but mine goes in)....
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Old 06-02-2011, 10:32 AM   #15
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check out ibonds, currently paying 4.6%
you can buy up to 10k per SS number.
If I bond fixed rate is 0.0% now and the inflationary rate as of May 1st is 2.3% for the next 6 months, then adjusted up or down on Nov. 1st how do you arrive at the 4.6%? Even if on Nov 1 the inflationary rate is pegged again at 2.3% would that not be considered paying 2.3% for the 12 month period? What am I missing?
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Old 06-02-2011, 11:01 AM   #16
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here is how the treasury calculates the 4.6 %
Individual - I Savings Bonds Rates & Terms
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Old 06-02-2011, 11:20 AM   #17
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If I bond fixed rate is 0.0% now and the inflationary rate as of May 1st is 2.3% for the next 6 months, then adjusted up or down on Nov. 1st how do you arrive at the 4.6%? Even if on Nov 1 the inflationary rate is pegged again at 2.3% would that not be considered paying 2.3% for the 12 month period? What am I missing?
You get 2.3% for 6 months. Hence, 12 months = 4.6%. It's not 2.3% for 12 months.
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Old 06-02-2011, 11:25 AM   #18
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Don't forget that the penalty (dollar amount) is tax deductible. Right off the top, not a deduction.
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Old 06-02-2011, 12:00 PM   #19
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You get 2.3% for 6 months. Hence, 12 months = 4.6%. It's not 2.3% for 12 months.
Thanks for the explanation, I learned something new today!
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Old 06-03-2011, 09:05 AM   #20
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Just to add to the conversation, USAA has the following penalties for early withdrawal. Seems like they've wised up to customers using their top rate and withdrawing early (unlike ALLY).

Thank you for your interest in establishing a CD with USAA, and the early withdrawal penalties. The Bank's penalty for early withdrawal is based on the term length of your CD, with the following applicable ranges:
  • CD terms of more than 30 days up to 1 year - Penalty is equal to 90 days of interest
  • CD terms of more than 1 year but less than 7 years - Penalty is equal to 180 days of interest
  • CD terms of 7 years or more - Penalty is equal to 365 days of interest
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