Certificate of Deposit

Archive for February, 2008

Question: Math functions problem?

A sales representative indicates that if a customer waits another month for a new car that currently costs $20300, the price will increase by 1.34%. However, the customer will pay an interest penalty of $857 for the early withdrawal of a Certificate Of Deposit if the car is purchased now.
a.) find the customer cost if purchased now
b.) find the customer cost if he waits a month

Answer: this question requires reduction of fractions over time

Finance & Investment Tips : Early Withdrawal Penalty on a CD Held in an IRA

Question: Difference between a Money Market and a CD?

Is one better than the other? Pros and Cons of each….

Answer: Sounds like I’m doing someone’s finance homework for them….

Difference?:
CD…are similar to bonds…except they are issued by banks and INSURED by the Government!!! Up to limited amounts.

Money Markets…are comprised of very short term debt obligations…corporate paper, overnight loans, short-term investments in general…etc Not insured by the government…but typically covered by SIPC insurance, an “investment industry” coverage…which is typically “unlimited” coverage.

One better than other?:
People commonly, almost universally, believe that CDs are “risk free”. They are NOT. FDIC insurance does not necessarily guarantee the interest that was expected over the term of the CD period…lets say you buy a 3 year Cd from a local bank or savings & loan…6 months later…someone was “cooking the books” or “skipped to Switzerland” with your $. You will get the “insured” amount back…eventually, once the government has allowed the “dust” to settle and “validate” accounts, liquidate assets, etc. You may not get your “principal” back for another 2 years…you’ll get it…but I’ve never heard of any time frame associated with “it must be paid back within “X” time…and I’ve looked for it!!! Opportunity risk and Interest Risk are both possible here.

Money Markets…are technically considered mutual funds. There has only been ONE instance of a Money Market losing money for investors in the entire history of money markets…and then the shareholders still got 96 cents on the dollar…probably the same or more than what their annual interest rate was up until they defaulted.

Pros and cons?:

CD Pros… Insured by the government, rate may be higher than Money Market.
CD Cons… Funds are typically “locked up” with penalties for set periods of time. Interest rates may rise and CD rates will typically not “adjust” until maturity.

Money Market Pros… money is completely liquid, immediate access to funds without penalties (typically). Investment company mmkt funds typically offer rates higher than at banks and are typically close to the same rates as ’short term’ CDs. SIPC insurance provides for the “easy transfer” of ownership/custodianship from one firm to the next…so if your investment company “goes belly-up”…the funds should be available much sooner than with FDIC insurance. No penalties for access to your funds (typically).
Money Market Cons…rates can fluctuate down….as well as up (can be a pro or con…depending on fate?). Subprime lending can affect the principal security of some Money Market accounts..could…not definitely. Rate may initially be lower than longer term CDs.

Taxed as Earned, Tax Deferred, TAX FREE