2 beginner questions on CDs

1) I assume my bank (Chase) isn't in the business of giving away money. If they sell me a 4% CD, they must be sure they can make more than 4%... what do they do with the $$$?

2) Why do rates vary? The ones I was looking at were highest for a

7-month CD, then they dropped for longer terms. Can someone splain me?

advaTHANKSnce

Reply to
stone583
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Buy Treasury bills or notes or bonds, among other things. Low risk stuff like that.

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Because the investment vehicles where they stash the money vary.

-- Todd H.

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Reply to
Todd H.

Oh as for the rate dropping for the longer terms, yeah that's screwy. It's because the yield curve is inverted/negative right now.

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See how the longer terms are lower than shorter terms for 1/17?
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Or graphically
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Normally you see an upward slope to that curve where you get higher yields the longer you tie up your money.

-- Todd H.

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Reply to
Todd H.

They loan it out. Banks are, fundamentally, in the business of gathering money and loaning it back out again. The difference between the cost of borrowing it (from you, as a CD) and loaning it out (as say an auto loan, or credit card, or short-term business loan) represents their profit. Think of all the different ways that you can borrow money through Chase.

Well first it's an unusual time at the moment, where longer-term rates are below shorter-term rates -- if you want to read the mundane details google INVERTED YIELD CURVE. So that might explain why a 7-month CD is the sweet spot.

Perhaps you mean that their 7-month is high relative to other banks, but their longer-term CDs aren't competitive. This happens because different banks do different things with the money, and choose to obtain deposits in different ways. Maybe Chase has an above-average need for money that they'll borrow from you for 7 months...because they'll use your money to make loans that will be repaid in 7-months.

The full answer is much more complicated but that's the basic idea.

-Tad

Reply to
Tad Borek

it's a common misperception that CD rates are based heavily on the yield curve or fed's interest rate decisions. indirectly they are certainly affected by rate moves, but in reality CD's are a bank's promise to pay you back. in return for borrowing your cash they also promise you a nominal rate of return. a miniscule fraction of the cash you give them goes to the FDIC who insures the bank in case they screw up majorly and can't pay you back. the rest gets lent out to borrowers (mortgage customers, for instance). at EVERY bank this is a SUPPLY/DEMAND question. if a particular bank has a large demand for mortgages and is successfully charging those clients 7% on the loaned money, said bank can offer 5% to their CD holders and the bank takes home the spread. if the martgage demand dries up, you will see the CD rates fall. this is why every bank charges a different CD rate.

as a matter of economic protection, banks are required to hold a certain amount of cash in their deposits relative to the amounts they have lended out, which naturally gives birth to this supply-demand relationship. banks offering higher than market interest rates on their CD's are actually just broadcasting their need for capital due to heavy lending demand.

hope this helps.

snipped-for-privacy@hotmail.com wrote:

Reply to
psynorm

They loan it to some other smuck for more than 4%.

It's called rate inversion, an uncommon phenomenon. Someone is expecting rates to drop in the future.

Reply to
PeterL

Look at the rate if somebody wants to borrow money from the bank, you will see the "spread"

Market changes very day. There is a so-called yield curve which more or less governs the rates of different maturities.

Reply to
My interest

They're not selling you a CD. You are loaning them the money at 4%. Then they loan it out at higher rates - mortgages, car loans, credit cards, etc.

Elizabeth Richardson

Reply to
Elizabeth Richardson

That is an interesting explanation. Suppose the OP had asked: "Why is the yield curve inverted/negative right now?" I would like to know the answer to that question. Someone, I forget who, was once asked "Why does opium induce sleep?" and the answer given was "because it contains a soporific essence which has the property of inducing sleep."

Reply to
Don

You and a lot of other people. :-)

-- Todd H.

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Reply to
Todd H.

several people mentioned the inverted yield curve, which is currently true. But even in a normal curve, sometimes the 7-month CD (or some other unusual number) will be at a higher rate than the surrounding ones. This is simply a promotional rate, like when something goes on sale at the grocery store. Sometimes due to a sale, it can be cheaper to buy 2 8oz cans than a large 16 oz can.

Reply to
Bucky

and, when it comes due, many people simply roll it over without checking the current rates. And, often, the roll over rate is a gyp.

Reply to
Gil Faver

Here are some current CD rates from a major online broker that brokers CD's from many sources and are available right now:

1MO 3MO 6MO 9MO 1YR 2YR 3YR 5YR 10YR 20YR 5.06 5.09 5.16 5.20 5.20 5.25 5.30 5.30 5.87 6.12
Reply to
Ernie Klein

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