Investing in CDs

[Accountant]

I have > 100k to in cash to invest and was looking at long term CDs as an option.  A couple of questions I had on the terms of the CDs.

1.  Call protection - most of the long term higher rate CDs don’t have call protection.  I am guessing if I were to get a 5 percent 10 year CD with no call protection, the likelihood of it being called when interest rates drop say in 5 years are high?

2. Coupon frequency - I get this determines interest payments.  Does this also determine compounding frequency?

[blue_green_sparks]

I have > 100k to in cash to invest and was looking at long term CDs as an option.  A couple of questions I had on the terms of the CDs.

1.  Call protection - most of the long term higher rate CDs don’t have call protection.  I am guessing if I were to get a 5 percent 10 year CD with no call protection, the likelihood of it being called when interest rates drop say in 5 years are high?

2. Coupon frequency - I get this determines interest payments.  Does this also determine compounding frequency?

I had a brokered 5-yr cd get called when its rate was about 1% higher than 5 yr bonds. I avoid them. My brokered CDs do not compound, they just pay out to cash periodically.

[Accountant]

How can you tell if a CD compounds?

[blue_green_sparks]

How can you tell if a CD compounds?

If they payout periodically to cash, they can't compound. That could be good if it's a taxable account. I have a regular bank CD that compounds every 3-months, so they advertised the nominal rate and the higher effective rates of return when including reinvested interest. I get principal and all the interest at maturity.

[cool7hand]

I think of CDs as savings and not investing. I consider anything with less than a 4% average return as savings. Is that wrong?

[dividendman]

Why do you want a long term CD and not a Treasury? Treasuries generally have higher rates, are liquid, and the interest is free from state income tax.

[NWOutlier]

I have a question as well; cd's lock your cash for a period of time, but you have access to the interest earned..... that said, my money market (e.g. settlement account) in vanguard in my brokerage account is at 7 day SEC yield 4.26%   and completely liquid. 

https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx

is there something I don't understand?  I get I'm not fdic insured, but - if we are looking at return... money market seems better.. .available dry power ready to deploy ...

Type   $/Share   Payable date    Record date    Reinvest date    Reinvest price   Distribution yield
Dividend   $0.003386   01/03/2023   12/30/2022   12/30/2022   $1.00   3.99%
Dividend   $0.002928   12/01/2022   11/30/2022   11/30/2022   $1.00   3.56%
Dividend   $0.002413   11/01/2022   10/31/2022   10/31/2022   $1.00   2.84%
Dividend   $0.001919   10/03/2022   09/30/2022   09/30/2022   $1.00   2.33%
Dividend   $0.001797   09/01/2022   08/31/2022   08/31/2022   $1.00   2.12%
Dividend   $0.001324   08/01/2022   07/29/2022   07/29/2022   $1.00   1.56%
Dividend   $0.000869   07/01/2022   06/30/2022   06/30/2022   $1.00   1.06%

[dividendman]

The vanguard fund is basically holding federal government debt so you get close to the 4-week treasury yield, but not quite. And if you want longer term then the treasury interest is higher still:

https://www.treasurydirect.gov/auctions/announcements-data-results/

[NWOutlier]

The vanguard fund is basically holding federal government debt so you get close to the 4-week treasury yield, but not quite. And if you want longer term then the treasury interest is higher still:

https://www.treasurydirect.gov/auctions/announcements-data-results/

darn it! where is the like button!

[Wintergreen78]

Right now Fidelity is offering one year CD ladders with an API of 4.5%. I’ve put some money that I may want later this year into a ladder.

I’d really struggle to chose a 10 year CD for an extra 1/2 a percent.

[EverythingisNew]

I don’t think callable CDs are a bad option. In this market you just need to consider that they will be called when interest rates drop, so the 10 year CD becomes a 1-2 year CD. Getting 5% for 2 years in a safe investment is pretty awesome.

[ChpBstrd]

I think of CDs as savings and not investing. I consider anything with less than a 4% average return as savings. Is that wrong?

Check out the current rates on CD's.

Why do you want a long term CD and not a Treasury? Treasuries generally have higher rates, are liquid, and the interest is free from state income tax.

We're in a weird spot right now where CDs are yielding higher than treasuries. I'm sure callability and liquidity are factors, but treasuries are not the highest-yielding 100% safe investment any more.

I don’t think callable CDs are a bad option. In this market you just need to consider that they will be called when interest rates drop, so the 10 year CD becomes a 1-2 year CD. Getting 5% for 2 years in a safe investment is pretty awesome.

Also consider that if your CD is called away, the bank would be handing your cash back amid a rate-cutting cycle, which usually occurs during a recession. Thus, it would probably be an ideal time to reinvest those funds into the stock market. Not a bad strategy.