This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

2 ways interest rates have shifted this year





In many cases, interest rates have sunk to the bottom and stayed there for so long you could assume they are more or less dead in the water. However, subtle changes in the relationship between interest rates of differing length have taken place during the first eleven months of 2013, and in a low rate environment, even subtle changes take on added significance.

Here are two examples of how interest rate dynamics changed during 2013, and what they mean for consumers.

Long vs. short CD rates

From the beginning of the year through late November, the national average for one-year CD rates fell from 0.23 percent to 0.20 percent, according to figures from the FDIC. Over the same time period, the national average for 5-year CD rates fell from 0.84 percent to 0.75 percent.

It is normal for long-term CDs to offer the best CD rates, but because long-term rates fell more sharply than short-term rates, this advantage narrowed from 61 basis points to 55. Does that diminished advantage mean that depositors should shy away from longer-term CD rates, especially given the risk of locking into historically low rates? Not necessarily.

The X-factor to consider here is the penalty for early withdrawal. Since these penalties are often based on a specified number of months worth of interest, when interest rates are low, those penalties are also diminished.

So, suppose you are looking for a one-year CD. On average, you could expect to get a 0.20 percent interest rate. As an alternative, you could choose a five-year CD at 0.75 percent. Suppose that five-year CD had a penalty equivalent to six months worth of interest, and after a year you decide that CD rates had risen enough to justify paying that penalty to get out of the CD.

You would net about 0.37 percent in interest -- better than you would have done in the one-year CD. In fact, as long as the penalty is eight months of interest or less, at a rate differential of 0.75 percent to 0.20 percent, you would be better off after a year taking the long-term CD and paying the penalty.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG

Markets

DOW 17,826.30 -279.47 -1.54%
S&P 500 2,081.18 -23.81 -1.13%
NASDAQ 4,931.8150 -75.9760 -1.52%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs