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chibiabos
Cosmic Pond Scum



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Certificate of Deposit
#26423053 - 01/08/20 02:18 PM (4 years, 1 month ago) |
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I understand the concept and all of that, but I'm wondering whether anybody could give me a little bit more insight into the pros and cons of the lower vs higher yield CDs. I'm assuming that the interest rates and APYs reflect something about how the money is being managed, but I don't really know enough about accounting to really have an opinion (beyond assuming that the higher yield accounts are probably going to be more risky).
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Ahab McBathsalts
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Re: Certificate of Deposit [Re: chibiabos] 2
#26423385 - 01/08/20 05:59 PM (4 years, 1 month ago) |
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https://www.shroomery.org/forums/showflat.php/Number/26400793
I wrote about the reason the rates are different for CDs. Because they are guaranteed and backed by Federal Deposit Insurance Act, they are all risk-less.
The reason different banks have different rates is the capital requirements of the bank. Some banks need more money, some have enough to meet all their financial ratios and targets, so they can offer lower rates because they don't need to attract capital.
Bonds have different rates because there is an element of risk, but CDs risk would require the bank to default and the federal government to default.
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chibiabos
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Quote:
Ahab McBathsalts said: The reason different banks have different rates is the capital requirements of the bank. Some banks need more money, some have enough to meet all their financial ratios and targets, so they can offer lower rates because they don't need to attract capital.
How's that need determined? Mostly asking out of curiosity. I'd assume that there's some mechanism in place to prevent banks from offering ludicrous interest rates and just pissing the money away.
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Ahab McBathsalts
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Re: Certificate of Deposit [Re: chibiabos]
#26423994 - 01/09/20 05:57 AM (4 years, 1 month ago) |
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Well yes, the more they offer up as interest the more they need to pay out as an expense.
There are a whole lot of banking regulations: Banking act of 1933 Dodd-Frank Wall Street Reform Act
Banks are audited internally, externally for shareholders and government agencies like the Federal Reserve. Banks are pretty risk- adverse organizations. Fraud isn't unheard of, but it would be extremely rare for it to be enough to cause a whole bank to default. Usually it's just some manager pulling a couple of hundred thou here or there to cover gambling habits or drugs or some shit.
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chibiabos
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Are there any advantage at all to investing in a CD with a lower interest rate then (like one at my local bank)? Is the idea there that the interest rates will be more stable and make your finances more predictable, or something? 
Either way, it's sounding like the basic idea for somebody like me would to sort of gamble on the whether the interest rates are going to fall and how much in liquid assets I'd need?
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Ahab McBathsalts
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Re: Certificate of Deposit [Re: chibiabos]
#26425237 - 01/09/20 06:47 PM (4 years, 1 month ago) |
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There is no advantage to getting a lower rate CD. All CDs are guaranteed by the government.
bankrate.com is a good website to compare CD rates.
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Brian Jones
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Generally you get a higher rate for a larger investment or a longer time period. But even the best rates for safe investments are pretty low.
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wildernessjunkie
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I was just looking at the rates on CD's. The CD returns roughly 2% and inflation is about 2% per year. The interest on the CD is close to the same as inflation. Why lock up your money for a minuscule return?
Is there something I'm missing? Do I understand this wrong?
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ashfiken
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No. You are correct. With interest rates as they have been quite awhile.. Its a useless investment
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Ahab McBathsalts
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Re: Certificate of Deposit [Re: ashfiken] 1
#26439021 - 01/17/20 06:08 PM (4 years, 30 days ago) |
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If you are saving up for a downpayment for a house it is a pretty good vehicle. If you know you can put $20k a year into a CD and it will take 3 years for your $60k downpayment it locks it in and you get a slightly better return than cash or government bonds. It is guarenteed and riskless. If it's locked in you won't be tempted to use it for other purposes.
First year you can buy a 2 year CD, second year a 1 year, and then at the end of your third year you have your payment and all your CDs mature.
Something you have earmarked you don't really want the volatility of an index fund or individual stocks.
Personally, I don't like the current risk profile of the overall market so I put like 1/3 of my new investment money into a stock index, 1/3 into gold, 1/3 into a CD dated for a year or 18 months away with the intention of putting it into a stock index in a year. Yeah, I'll probably lose out on trying to time the market and long term it would be better to put it into a 60/40 index and not think about it, but at the end of the day your risk profile is a very individual thing and two people won't see the same macro events the same way. If you are stressed out about your investments you have too much risk, even if that is a really low amount of risk. Your risk profile with change over time and with what is going on in your life.
Some people can throw it at penny stocks and crypto and be fine with it, but some people need to keep some assets in a CD to sleep well.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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