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Comparing CD Rates/Terms
Old 04-14-2016, 06:42 PM   #1
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Comparing CD Rates/Terms

Please help me with a thought experiment. I have a $250k CD at Ally expiring. Their 5 year interest rate on a new CD is 2%. At MidFirst bank, however, their rate on a 10 year CD is 2.5%. I don't know the early withdrawal penalty at MidFirst, but assuming it's six months of interest, please tell me if my logic is correct:

With the 5 year option, I'd earn $5k/year in interest
With the 10 year option, I'd earn $6,250/year in interest

If indeed the early withdrawal penalty is six month of interest, i.e. $3,125, then as long as I plan to hold the CD for at least three years, I do better by opting for the 10 year option since it will out-earn the 5 year option by $3,125 in 2.5 years anyway, and after three years, it will have also covered the early withdrawal penalty. Therefore, if I hold it for a full five years, I come out better with the longer term option even if I pay a penalty.

Is this correct?

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Old 04-14-2016, 09:16 PM   #2
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You need to actually find out the early withdrawal penalty on the MidFirst CD.

Once you do that, this calculator could help you decide:

Is it Worth Paying an Early Withdrawal Penalty to Break my CD?

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Old 04-15-2016, 06:20 AM   #3
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I think you are right... 2 1/2 years assuming the penalty is 1/2 year interest.

2x = 2.5x -2.5*.5
2x = 2.5x -1.25
1.25 = 0.5x
2.5 = x
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