Certificate of Deposit

Archive for September, 2010

Question: How do you Price a Certificate Of Deposit: see details below?

A UK, CD has a quoted current yield y = 10% and a face value of £1m. It now has 60 days to maturity but when it was issued it had an original maturity of 120 days and a quoted yield of y = 12% p.a. (Day count convention is actual/365).

Calculate :
(a.) the current market price (P) of the CD.
(b.) check that at this price you will earn 10% over the remaining life of the CD.

Answer: Not a very realistic question

I think your teacher has the decimal point in the wrong place … a 60d CD would have a yield of 1% (if you are lucky )

Assuming zero inflation (which we have to, since you don’t quote a figure .. although you do say UK, so I COULD look it up .. but I leave that to you … why does it matter ???? well let’s assume the CD is in Zimbabwean Dollars [which were suspended indefinitely on 12 April 2009, due to hyperinflation] ) …

When it matures you will get face value (£1m) plus the original yield.

Amount you will get is thus £1m + 12% * (120/365) [this assumes that ALL the interest is paid at maturity and NOT accumulated on a daily basis]

So if the ‘yield’ is now 10% p.a. with 60 days to go, then this must mean that the actual payout (above) is equal to what you paid + 10%* (60/365)

(I assume you can use a calculator to work this out ?)

Wealth Accumulation with FREEDOMFLEX®

Question: What is the best type of account to put that much money into so that is safe until they retire?

Hi there,

This is a vague question dealing with a lot of money, but I am hoping in a nutshell someone can guide me in the right direction.

My parents have about $1,000,000 saved in various retirement accounts. They are not old enough to withdraw that money, since they are only 63. My Dad wants to move most of the accounts into cash- perhaps CD’s or an Insured Money Market account. I have never heard of an insured Money Market account, so I am not sure if it is safe or not. The question, perhaps, is what is the best type of account to put that much money into so that is safe until they retire. They are in some mutual fund accounts, but they seem to be losing a lot of money-like the rest of us! (LOL). Any help would be appreciated.

Thanks

Answer: I presume that the accounts are either IRAs, Roths, or 401Ks.

All of these will include options for how the funds are to be invested. These options range from aggressive to stable funds. Every plan should have at least one stable value fund option, which is an insured Money Market fund. Your parents can move their money from mutual funds into this stable value fund.

As long as the money remains within the plan, moving from fund to fund within the plan is not a taxable event, nor does it have to be reported to the IRS.

MARKET MELTDOWN

Question: Are there different types of Money Market accounts related to a 401k plan?

In my 401k can I put all my contributions into 1 money market account.Or do I have to split my contribution up>

Answer: Yes…although I’m not sure I understand the question you mean to ask.

A 401(k) plan may actually have two or more accounts for you — your contributions will be kept “separately” from your employers contributions for you, for example — but if a Money Market fund is offered for your plan, you should be able to put 100% of your contributions in that Money Market fund.

Investment Facts : Advantages of Investing in a Money Market Account