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?
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?
