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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Re: Thinking about getting into treasuries Date: 3/14/2011 12:09 PM
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kmart00,

You wrote, By my calculation, if I deposit $5k in a 5 year CD with Ally @ 2.37%, and I need to withdraw in, say, 6 months, I would receive approx. $39.50 in interest ($59.25 - 2 months interest of $19.75). On my original deposit, this would give me a yield of around 1.27%? Is my math right here?

I'm not sure you annualized the yield correctly. The current APY on a 5 year CD is 2.40%. You would be surrendering 1/3rd of that if you cash out in 6 months. So the APY should be close to 2/3rds of 2.40% or about 1.60% APY - not the 1.27% you are estimating.

The risk here is that if you withdraw within the first 2 months, you could have a negative return.

Also, If this is the case, this almost seems too good to be true. Park all of your money here in, hypothetically, $1k increments and let it grow! Only redeem what you need and pay a penalty on that.

Am I reading this right?


Yeap, that's right. In theory you could open CDs at Ally for as little as $1; but my account integration site treats them all as individual accounts, which can get kind of silly. Also, I'd worry about loosing interest because of rounding.

The one down-side to Ally is it's strength. Ally was GMAC Bank, which was owned by GM. Ally is not a financially strong bank and it offers such relatively good terms to attract customers. Unfortunately when rates reverse, Ally is going to see people breaking their CDs to chase rates. This could cause them a very real liquidity problem and if deposits leave the bank, it could impact their capital ratios. Worse case would be an FDIC seizure.

But as a depositor, that just means you can't be 100% certain the bank won't eventually have to break your CDs mid-term and you might have to go looking for another place to put the funds at an otherwise inconvenient time.

BTW, most of my e-fund has been sitting in 5-yr CDs there at 2.95% APY for the past 6+ months.

- Joel
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