Banking 
8
comments

What is a Triple Option CD?

When I read a Bank Deals’s article about a “triple option CD” from Southern State Bank in Arkansas, I was perplexed. I thought I knew what all the various certificate of deposit types were whenever I wrote that Certificate of Deposit Zoo post… but I was wrong.

What is a triple option CD? A triple option CD is a CD that combines the features of a bump up CD with a no-penalty CD. For those enjoying the zoo analogy, the triple option CD is a modern day Chimera. With a triple option you can usually:

  1. Make another deposit into the CD,
  2. Increase your rate once during the original CD’s term,
  3. Withdraw part of the CD under certain circumstances.


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 Banking 
5
comments

Do CD Rates Rise Before Bank Failures?

When Washington Mutual collapsed about a year ago, it was offering an eye-popping 5% interest rate on certificate of deposits when its competitors were offering half that. Everyone knew that WaMu was in trouble and we all ran into the open arms of the 5% CD because it was FDIC insured. Were we right in thinking the higher rate a good indicator of a bank’s weakness?

Perhaps.

But I can say, with a little data to back me up, that a bank on the verge of failure may not show it in its CD interest rates. Corus Bank, one of the banks that failed on Friday, was on my list of best CD rates. Since June, I’ve been populating that table with the help of a database on the back end. That also means that I have historical rate information, which will come in handy to see if we could’ve predicted a bank failure based on CD interest rates.

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 Banking 
13
comments

Ally Bank Savings & CD Rates Confuse Me

Ally BankEvery week I get an email from Ally Bank informing me of how the rates will be changing (Ally Bank rates are adjusted on Fridays) and their rate structure has been confusing me as long as I’ve been getting these emails.

Ally Bank’s Savings & CD Rates

Rates are subject to change, here are the current Ally Bank CD rates.

Why Is This Weird?

Typically, your online savings account interest rate should be the lowest of the three (CD rates should be higher given restrictions). Next would be the 9 month no-penalty CD rate followed by the regular CD rate. You should get a lower interest rate on the account with the most flexibility. Since you withdraw money from a savings account at any time, you should be paid the least amount of interest in that account. Since you can withdraw your money from a no-penalty CD at any time without penalty, it should have a lower interest rate than a regular CD, where you would have to pay a penalty to access your funds.

Ally Bank has had this interest rate irregularity for a while now but recently it’s come back in line.

So What?

If you have money in Ally Bank’s online savings account, you should open a 9 month no-penalty CD immediately and transfer all your funds into that CD. Should the online savings account interest rate ever increase past the no-penalty CD, then you could liquidate the no-penalty CD without penalty. If you need the money, you can liquidate the no-penalty CD.

In fact, the best strategy would be to open up multiple no-penalty CDs so that if you do need the cash you don’t have to close out one big CD. Ally Bank does not have a minimum for CDs. For example, if you have $5,000 to save and you aren’t sure if you need the money. Open up five $1,000 no-penalty CDs. If you need $500, you can just close one of the CDs. If you opened up one single $5,000 CD, then you’d have to liquidate the whole to get access to just $500.

Am I missing something?


 Banking 
23
comments

Where To Invest $1,000

Every once and a while I get an email from a reader that asks where he or she should invest $1,000.

My answer? An online savings account or a certificate of deposit.

Unfortunately, $1,000 just simply isn’t enough for you to invest in the stock market. It’s certainly not enough for real estate and it’s usually not enough for investing in any asset class.

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 Banking 
32
comments

Bank CD Rates

How much money do you have sitting in a savings account? $500? $1,000?

Do you have plans for that money? If not, it should be in a certificate of deposit at your bank. If your bank doesn’t offer good CD rates, then you should open a CD with an online bank and take advantage of their better interest rates. If you don’t think you have enough money, you’re wrong. You can open a CD at an online bank with a single dollar.

One dollar.

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 Banking 
5
comments

No-Penalty CD (Certificates of Deposit) Rates

Ally Bank was the first online bank to offer a no-penalty certificate of deposit and now it appears that the idea is catching on. Discover Bank will announce tomorrow that they are making their 12 month CD a no-penalty CD, where you can withdraw your funds should you involuntarily lose your job. All new and renewing account holders will get this benefit (existing account holders won’t, I assume because neither party can change the terms before maturity).

What is a No-Penalty CD? If you read my Certificate of Deposit Zoo post last week, then you’ll know that no-penalty CDs are ones where you can withdraw your deposit before the CD’s maturity date without any interest penalty. Normally a CD will charge you 3-6 months worth of interest to close it early, no-penalty CDs let you close your account.

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 Banking 
12
comments

Ally Bank’s No Penalty CD Rate Arbitrage

Ally BankIf you look at Ally Bank’s current rates, there appears to be a discrepancy in the way they’ve structured their rates. I tweeted about this last week and it appears the difference in rates has persisted through a recent rate drop, making it doubly curious. Let me explain what I mean.

As of today (June 22, 2009), here are the current rates of several of their products:

  • Traditional 9-month CD: 1.75% APY
  • No-Penalty 9-month CD: 2.15% APY
  • Online Savings Account: 2.00% APY

Two things surprise me:

  1. A traditional CD should never have a lower yield than a no-penalty CD of the same maturity. With a no-penalty CD, you have the right to close the CD before the maturity period without penalty. The bank can’t close it. You should be paying, through a discount on the interest rate, for that flexibility. When the no-penalty CD first debuted, its interest rate was a tenth of a percent lower than the traditional CD’s rate.
  2. The no-penalty 9-month CD with a higher yield than the online savings account represents an opportunity. We’re in a period when rates on savings accounts and CDs are dropping. However, should rates ever make a turn and start rising, being locked into a CD might be bad news. However, with a no-penalty CD, I can close at anytime so the risk is minimal! There is no reason why someone should keep their funds in an online savings account when the same exact bank is offering a no-penalty CD option with a higher interest rate.

This morning I transferred all my funds from my Ally Bank online savings account into the 9-month no-penalty CD to get that extra 0.15% APY. If the two accounts weren’t at the same bank, I wouldn’t have done it because the transfer time would’ve cost me interest. However, anytime someone is willing to give me a $2 bill in return for a $1, I take it. :)

Is there something I’m missing?


 Banking 
10
comments

Best Money Market Account (MMA) Rates

(Updated 9/1) In the world of banking products, you are always trading off interest rate for flexibility. Typically the higher the interest rate, the less flexible the account. Take CD rates for example, they are often higher than savings accounts and they are less flexible. You decide how long you’re willing to keep your money locked up and then pick a bank that offers the best rate for that term. If you wish to get your money early, you pay penalty. On the other end are checking accounts. Checking accounts have the worst interest rates but offer the most flexibility. You can get your cash whenever you want it, write as many checks as you’d like, and visit your own ATM without penalty. For that flexibility, you earn very little, if any, interest.

Where does that leave money market accounts?

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