Monthly vs. semi-annual interest payments on CD's

BrianB

Recycles dryer sheets
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Sorry if this is a simple question but my math skills have abandoned me today.

I just learned that brokered CD's (like those bought through Fidelity or Schwab) pay simple interest, not compound interest. That started me thinking: How do I calculate the improved return on a monthly pay CD compared to an annual or semi-annual pay CD?

Example using round (not real) numbers:

$10k CD 6% interest paid annually would pay $600 at the end of the year.

$10k CD 6% interest paid monthly would pay $50 at the end of each month. If I put those payments into a 6% money market that compounds daily when received how much more would I have at the end of the year?

Conversely, how much of a discount on the rate should a monthly pay CD have to break even with an annual or semi-annual pay CD?

Is there a built-in Excel function that could simplify this calculation?

BrianB
 
No brokered CD compounds interest. The payment terms are listed in the CD details. Brokered CD’s have had the advantage over the past two years, as Fidelity’s MM accounts have been paying just under 5%. Most CD’s only pay interest twice a year or yearly.
 
No brokered CD compounds interest. The payment terms are listed in the CD details. Brokered CD’s have had the advantage over the past two years, as Fidelity’s MM accounts have been paying just under 5%. Most CD’s only pay interest twice a year or yearly.
All the CD's we have are brokered and purchased through Fidelity. In their listings they show the interest payment as monthly, quarterly, semi-annually or annually.

I have purchased mostly monthly pay CD's but often they are .05% to .15% lower rate than CD's with semi-annual or annual pay out.

The numbers & rates I used in my example are purely hypothetical - I just wanted some easy, round numbers to simplify the calculations.

My question is about how much I would increase my total return if put the monthly interest payments into a MM account as soon as I receive them, and how much of a rate differential would make the different payment periods equal in total return if I do that.

BrianB
 
With Fidelity, your interest is automatically deposited in your base account, probably FDRXX or SPAXX. Last time I checked, both were paying about 4.97% APY. The MM rates will likely be reduced quickly when the Fed begins cutting rates. Remember, this happens automatically at Fidelity.
 
I think I may have found the calculator I need:

Compound Interest Calculator

Based on the numbers I used in post #1 for the monthly pay CD: $50 interest payment each month put into a MM account at 6% would be $618.31 at the end of the year compared to the $600 payment on an annual pay schedule.

That's the equivalent of getting 6.18% on the annual payout CD. Therefore, if the monthly pay is within .18% of the annual pay, then the monthly pay could have a better total return, if I put that interest into the MM immediately when received.

Lower rates for the CD or the MM would reduce the advantage, but the monthly pay should always be better total return.

My math here is fuzzy, but if I have anything wrong let me know.

BrianB
 
Seems like lots of work to make potentially $18 a year. I think your actual increased interest, after accounting for transfer time between banks won’t be much more than $1 per month. Is it worth it?
 
Monthly CD's help levelize income cash flow. Instead of chunks of interest every quarter, semi annual, or annual, the deposits hit every month. I reinvest the cash from interest payments and maturing CD's in new CD's or ETF shares, or leave it in SPAXX. I wait until I accumulate $5000 before buying another CD. Fidelity fixed income analysis tool makes keeping track of large numbers of CD's. I know will sound crazy, but I've got $880,000 in monthly CD's maturing over the next 3 years.
 
All the CD's we have are brokered and purchased through Fidelity. In their listings they show the interest payment as monthly, quarterly, semi-annually or annually.

I have purchased mostly monthly pay CD's but often they are .05% to .15% lower rate than CD's with semi-annual or annual pay out.

The numbers & rates I used in my example are purely hypothetical - I just wanted some easy, round numbers to simplify the calculations.

My question is about how much I would increase my total return if put the monthly interest payments into a MM account as soon as I receive them, and how much of a rate differential would make the different payment periods equal in total return if I do that.

BrianB
If you have a $100 CD that pays 6% once a year then at the end of they year you have $106.00

If you have a $100 CD that pays 6% monthly and you are able to reinvest the monthly interest received at 6% the at the end of the year you have $106.17 [100*(1+6%/12)^12]
 
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