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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35245  
Subject: CD rate up to 4.7% Date: 3/19/2005 10:01 AM
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Just checked my C.U. for next week, and 5-year rate is up from 4.6%, where it has been stuck for quite a while.

I have a big CD to roll over in about 3 weeks. Let's have some group think for a sudden surge in bond yields over the next couple.
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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12101 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/19/2005 2:18 PM
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You know about Pentagon Fed. CU, is there a reason your not considering them?

Money Market Certificates    
Term     Dividend Rate APY 
 6 Month 2.39%    2.40 % 
 1 year  2.96%    3.00 % 
 2 year  3.44%    3.50 % 
 3 year  4.16%    4.25 % 
 4 year  4.55%    4.65 % 
 5 year  4.88%    5.00 % 
 7 year  5.02%    5.15 % 
 


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Author: bogwan Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12102 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/19/2005 3:00 PM
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Sir Alan says he is going to keep raising the fed funds. My guess is that by year end it will be 3.5% or more. It would suck to tie up your money for 5 yrs when the 1 yr rate might be 5%

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12103 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/19/2005 5:48 PM
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My guess is that by year end it will be 3.5% or more. 
It would suck to tie up your money for 5 yrs when the 1 yr 
rate might be 5% 

Why do you think the 1 yr CD would be 5%  
Historically (2001-2004) the maximum spread between the 
Fed Funds and 1 yr CD look closer to 0.5%.



	     1 yr CD  Fed Funds	Diff.
7/13/2001	4	3.77	0.23
8/9/2001	3.75	3.65	0.1
9/21/2001	3.4	3.07	0.33
10/24/2001	2.75	2.49	0.26
11/21/2001	2.5	2.09	0.41
2/18/2002	2.25	1.74	0.51
1/24/2003	1.75	1.24	0.51
8/18/2003	1.5	1.03	0.47
11/11/2004	2	1.93	0.07


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12104 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/19/2005 7:47 PM
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"You know about Pentagon Fed. CU, is there a reason your not considering them?"

Thanks for the reminder. That's actually the plan. I'm hoping they, too, will have raised their rate.

But I do intend on going with 5-year CDs. Waiting around has proved a losing proposition, and I'm far from convinced the Fed will really go through with increases if they are worried about oil prices slamming the breaks on the economy (I am), though, of course, inflation from pass through of fuel costs is also likely (or both—Kent's "stagdeflation").

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Author: terminalwriter Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12106 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/20/2005 9:50 AM
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Sir Alan says he is going to keep raising the fed funds. My guess is that by year end it will be 3.5% or more. It would suck to tie up your money for 5 yrs when the 1 yr rate might be 5%

I keep going over this in my head for my e-fund. I'm about to retire the last of my debt. I have my e-fund split into several categories and thought that I would keep half of it in an MMA for easy access and the rest somewhere a little less liquid for greater return. I thought I'd go with Savings Bonds and I-bonds, due to the fact that they would have the advantage of rising with the rising rates. But on the flip side, CDs have so much higher rates. I'll probably be adding money to these accounts over time, so again, EE & I Bonds have the advantage there. I'm just not quite sure yet.


TW

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12109 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/20/2005 10:34 AM
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"I keep going over this in my head for my e-fund. I'm about to retire the last of my debt. I have my e-fund split into several categories and thought that I would keep half of it in an MMA for easy access and the rest somewhere a little less liquid for greater return. I thought I'd go with Savings Bonds and I-bonds, due to the fact that they would have the advantage of rising with the rising rates. But on the flip side, CDs have so much higher rates. I'll probably be adding money to these accounts over time, so again, EE & I Bonds have the advantage there. I'm just not quite sure yet."

The Fed (in article posted above) is talking about long term neutral rate of 2% above inflation, which means 5-year T-bills should be even higher (barring inverted yield curve). This still suggests to me going for EE-bonds, at 90% 5-year T-bills, rather than 1% fixed rate with I-bonds.

Currently 5-year T-bills are at 4.14%. I'm still betting I'll do better with a 5-year CD than an EE-bond over next 5-years, but I'm not in a position to get full tax advantages. On the other hand, looking at a strategy of living off taxable account savings for 5-7 years, starting about 10 years from now, my income taxes then may be close to zero, which would make the EE choice more attractive.


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Author: bogwan Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12113 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/20/2005 12:41 PM
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I agree with your analysis, but don't assume that 3.5% is a cap. In 2 years it could be 7%, who knows.I wonder if it is worth tying your money up for extra 1%.

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12115 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/20/2005 2:48 PM
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I agree with your analysis, but don't assume that 3.5% is a cap. In 2 years it could be 7%, who knows.I wonder if it is worth tying your money up for extra 1%.

I agree rates could be anything but I would rather earn 5%+ while waiting. If rates went to 7% I would cash in the 5 yr CD and buy the 7% CD. The money is not tied up. Yes I would loose 6 months interest but I'm still way ahead of shorter term CD's. From my calculations, if one has a lump-sum to invest, 5 yr 5% CD's are best, shorter term or laddering produces less of a return no matter what rates are in the future. That's what I do, hoping I didn't make a mistake in my spreadsheets.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12116 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/20/2005 4:58 PM
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"I agree with your analysis, but don't assume that 3.5% is a cap. In 2 years it could be 7%, who knows.I wonder if it is worth tying your money up for extra 1%"

I don't assume a cap. But waiting for interest rates to go up has been a losing proposition for the last three years, all at a time when rates were at historic lows, the economy was expanding, and the presumption was that rates would be going up soon. I still expect rates to go up, but with laddering 5-year CDs, you always get the average rate without guessing. And, don't be surprised if rates go back down before the Fed gets to 3.5%. The real purchasing power of the take home pay of the average worker continues to decline and the boost in family incomes from two people working (the neglected key to economic expansion in the '80s and '90s, along with baby boomers in the work force) has been there and been done.

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12117 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/20/2005 9:57 PM
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Please note that the 5.02% on the 7 yr PFCU CD is the interest rate and not the APY which is higher. Also note that if you have to cash in the 7 yr early, you lose a whole year of interest instead of 3 mo.

I have a 5-yr CD with PFCU and just sent money in for a 4-yr CD paying 4.65% APY. I'm trying to construct a 5-yr ladder with them.

brucedoe

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12118 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/21/2005 2:20 AM
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I have a 5-yr CD with PFCU and just sent money in for a 4-yr CD paying 4.65% APY. I'm trying to construct a 5-yr ladder with them.

Five year CD yields 5% for five years. Four year CD yields 4.65%.
5%-4.65% = .35%/yr x 4yr =1.40%. Over the four years you are giving up 1.40%. Worst situation with a five year CD is it has to be sold at the end of four years. The penalty is 6 months interest which would be 5%/2=2.5%. What you did is the best choice assuming the five year rate will be greater then 5% in five years. But isn't the situation: buy the 4 year and know that you lose 1.4% or buy the 5 yr and possibly lose 0.9% if you have to sell at the end of four years? How should one look at this?

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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12119 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/21/2005 7:57 AM
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Five year CD yields 5% for five years. Four year CD yields 4.65%.
5%-4.65% = .35%/yr x 4yr =1.40%.


Unless PFCU does things differently, the math here is wrong. The APY (ANNUAL percentage YIELD) is what the CD earns each year, not over the term of the CD. If what you said were the case, it would almost never make sense to take out the longer term CD, because you'd be earning less/yr the longer you held it. In reality, a 5yr CD earnring 4.88% APR (5.00 APY) would yield 27.6% over it's life. A 4 yr @ 4.55% APR (4.65 APY) yeilds 20.0%. Both example assume interest is compounded daily, which I believe PFCU does.

TMF has a decent calculator for determining the value of a CD at maturity. Check it out here (it's the last one in the list): http://www.fool.com/calcs/calculators.htm?source=LN#saving

1x1y

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Author: bogwan Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12123 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/21/2005 12:33 PM
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For those interested in international bond funds, GIM has gone to a discount. Needless to say it perhaps deserves to be at a discount.

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12124 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/21/2005 3:01 PM
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Unless PFCU does things differently, the math here is wrong. The APY (ANNUAL percentage YIELD) is what the CD earns each year, not over the term of the CD. If what you said were the case, it would almost never make sense to take out the longer term CD, because you'd be earning less/yr the longer you held it. In reality, a 5yr CD earnring 4.88% APR (5.00 APY) would yield 27.6% over it's life. A 4 yr @ 4.55% APR (4.65 APY) yeilds 20.0%. Both example assume interest is compounded daily, which I believe PFCU does.

Thanks for checking my post for it is important for us to be critical of anything we read. But I think you missed the fact that I multiplied the annual APY times the number of years. You are right this is not 100% accurate but I have found it to be close enough. To be 100% accurate,(using Excel, one would earn over four years 19.996% on a the four year CD and 18.616% on the 5 year CD if sold at the end of five years, including the loss of the last 6 months of interest. The four year CD approch is better by 1.344%. Your right that is different then 1.40%. But that doesn't change my conclusion. I would sure appreciate it if you could explain in more detail what you mean by "it would almost never make sense to take out the longer term CD, because you'd be earning less/yr the longer you held it." I don't understand how you come to this conclusion.



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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12126 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/21/2005 7:27 PM
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Correction:

,(using Excel, one would earn over four years 19.996% on a the four year CD and 18.616% on the 5 year CD if sold at the end of five years, including the loss of the last 6 months of interest.

Sould read:

,(using Excel), one would earn over four years 19.996% on a the four year CD and 18.616% on the 5 year CD if sold at the end of four years, including the loss of the last 6 months of interest.



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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12127 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/21/2005 7:58 PM
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Thanks for checking my post for it is important for us to be...

I guess I should start by first apologizing for my post which obviously offended you. My intention was not to criticize but to clarify a post which, IMO, was somewhat difficult to follow.

With the following assumptions...:
1 - 4yr CD w/APR=4.55%, 5yr CD w/APR=4.88%
2 - penatly for selling a CD before maturity = the prior six months interest
...I agree that selling the 5yr CD after only 4 years will yield less than selling the 4yr CD at maturity. I'm not clear, however, why this ever came up as a "worst situation".

I'm also not clear if the method you're using to approximate things "works" because it's fundamentally sound or because the terms of the CDs in question are short and the difference in rate is small (relatively, of course).

I would sure appreciate it if you could explain in more detail what you mean by "it would almost never make sense to take out the longer term CD, because you'd be earning less/yr the longer you held it."

From your post:
Five year CD yields 5% for five years. Four year CD yields 4.65%.
I guess I misread this as saying that if you bought a 5yr CD with $1,000, then it would be worth $1050 after 5 yrs. As we both know, that's not the case. Rather than mislead anyone might be just skimming the thread, I'll chose not to elaborate any further on how I came to the conclusion I did. If you want the full explanation, e-mail me and I'll be glad to share it. Or suffice it to say that it was based on a misunderstanding of your original post.

1x1y

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12129 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/22/2005 1:40 AM
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Not offended, you were just saying what you thought. My writing skills are very poor and I realized you took the time to respond so I should pay attention to what you said. I should thank you and look more closely at what I was thinking. My original response was motivated by brucedoe saying “I have a 5-yr CD with PFCU and just sent money in for a 4-yr CD paying 4.65% APY. I'm trying to construct a 5-yr ladder with them.” My first response was: buying a ladder is very popular but a dumb thing to do. So I did some calculations and it turned out that he was right and I was wrong. Just thought others might be interested. It's not important and sorry for taking up space. Thanks again for your thought.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12130 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/22/2005 9:54 AM
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"My first response was: buying a ladder is very popular but a dumb thing to do. So I did some calculations and it turned out that he was right and I was wrong."

I think, as with many things, being stuck using the same word for different things leads to confusion. We call both a gradually built ladder of 5-year CDs and an instant ladder of 1-5 year CDs, laddering. Unless interest rates go up quickly and dramatically during the 5 years, chances are an instant ladder of 1-5 year CDs, or any use of shorter CDs, will not beat putting the lump sum into a 5-year CD. But, if you are going to need cash before 5-years, unless the bank has made a mistake in calculating penalties, you will normally be better off with the shorter CD than cashing in a longer one early.

Laddering, like dollar cost averaging, is generally a good idea, because it provides liquidity and allows you to catch changes in interest rates without having to guess when the rates are going to change. However, to be effective, laddering needs, as much as possible, to use the optimal investment instrument available at a given moment—by optimal, I mean whatever is paying the best yield, without locking you in to the detriment of needed liquidity or to a low rate for so long that chances are you would be better rolling over a shorter maturity at a higher rate down the road.

Optimizing, of course, is always somewhere between an educated guess and a crap shoot. For example, with liquidity, we'd want to keep the amount of cash in lower paying instruments (money markets, shorter CDs) to a minimum, but we also need some margin for unexpected expenses. It is also sometimes unavoidable to use a 1-5 year ladder (at least at times, like now, when we want to avoid bond funds that would provide liquidity)—I made a mistake a couple of years ago and decided to do a 1-5 year ladder on a large CD in an old rollover IRA of my wife's, on the grounds that it would be necessary someday to make this account more liquid to allow for minimum distribution requirements. I figured that was as good a time as any, since I expected rates to be going up sufficiently to make up some of the difference in return compared to just using a 5-year CD and waiting. Crap shoot trumped educated guess.

I'm pretty sure Bruce is using a 4-year CD, because he expects to need the money in 4 years. That's a different strategy than deciding to go for a shorter CD with the expectation that rates will have gone up enough by time that CD comes due to make up for the lower rate for the period of the shorter CD.

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Author: GREYFOX Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12208 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/29/2005 5:57 PM
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mjcalab; What if rate 18 months from now is 7%??

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12211 of 35245
Subject: Re: CD rate up to 4.7% Date: 3/30/2005 1:17 AM
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mjcalab; What if rate 18 months from now is 7%??

First thing that comes to mind is that I would be very depressed because I would have very large losses in the stock market. But that's probably not what you are asking.

I'm under the impression that future interest rates cannot be predicted. So I feel ok with the highest rate at the lowest risk when I have funds to invest. If rates continue to go up as you indicate, I will calculate, along the way, the point at which I would be better off selling, taking into account the early withdrawal penalty, If there are good value stocks at low P/E and their dividends are close to the CD rates then I would probably buy stocks, otherwise I would look for the highest yielding lowest risk fixed investment.


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