CD question

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DoubleR
Posts: 19
Joined: Tue Jul 18, 2017 7:10 am

CD question

Post by DoubleR » Mon May 28, 2018 5:22 pm

I was looking at cd rates and had a question.

If the interest rate is 1.75% for a 3 month cd and 2.2% for a 1yr cd wouldn't you be better off investing in the 3 month cd and just keep rolling it over every 4 months?

I have never bought a cd so there has to be some kind of catch that I dont know about.

Mitchell777
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Joined: Mon May 21, 2007 6:32 am

Re: CD question

Post by Mitchell777 » Mon May 28, 2018 5:27 pm

The 1.75% is probably an annual yield unless it's some sort of Special to get you in the door, in which case you probably would not be able to keep rolling it over at that rate

RickBoglehead
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Re: CD question

Post by RickBoglehead » Mon May 28, 2018 5:54 pm

Right.

WolfgangPauli
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Re: CD question

Post by WolfgangPauli » Mon May 28, 2018 5:56 pm

What is the purpose of the money? Will you keep in cash? My overall general advice would be to take the 3 mo CD as the 1 year seems "OK" but nothing spectacular. I do not market time with stocks or interest rates however the Fed has all but promised us 3 more rate hikes so keeping your cash in a fairly short duration instrument seems to be smart to me.
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com

DoubleR
Posts: 19
Joined: Tue Jul 18, 2017 7:10 am

Re: CD question

Post by DoubleR » Mon May 28, 2018 6:00 pm

I dont know why I didn't look, but I found a CD calculator on the net....lol. I ran the numbers on that and can see the difference now.

Thanks for the replies.

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Kevin M
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Re: CD question

Post by Kevin M » Mon May 28, 2018 9:02 pm

Which one does better depends on how fast and by how much the 3-month CD yield increases over the next year. If it were not to increase at all, you obviously would do better with the 1-year CD. Since you don't know how the 3-month rate will change, you don't know which will do better, but we can calculate how it would have to change to do better.

If the 3-month increased 0.3 percentage points (30 basis points) every three months for the next year, the average of the 3-month yields would be 2.20%, and you would earn about the same as if you held the 1-year CD for one year. So that would be 3-month rates of:

1.75%
2.05%
2.35%
2.65%

If the 3-month rate increased more than that on average, you would do better rolling 3-month CDs, and if it decreased less, you would do better holding the 1-year CD.

Kevin
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