what CD is better..?

Question

A) 5% for 9 months
B) %4.75 for 3 months

Thanks

i thought that after 9 months you get your %5 interest...if thats the case then wouldn't %4.75 interest in 3 months = more money?

Answer 1

Assuming all rates are ANNUAL rates with no compounding
during the life of the CD, and the 3 month CD can be renewed at the same rate:

A)5% for 9 months = 0.05 x 9/12 = 0.0375 or 3.75%. For a $1000 CD, you earn $37.50.
B)4.75 for 3 months = 0.0475 x 3/12 = 0.011875 or 1.1875%
For a $1000 Cd you earn $11.88 the first 3 months.
You then have $1011.88 for a new 3 month CD that earns $12.02. Now you have $1032.90 for a final 3 month CD that will earn $12.16. Your total interest is $11.88 + $12.02 + $12.16 = $36.06.

The 9 month 5% CD earns $1.44 more than 3 CDs for 3 months at 4.75%

Zoo Station's conclusion is accurate, but the answer is NOT obvious.

Answer 2

5% refers tp the 12 month yield. For the 9month period you would earn 3.75% (9/12 x 5%)

4.75% refers to the 12 month yield. After 3 months you would earn 1.1875%

CD yield are always stated for the 12 month period (yield per annum). This is done so you can compare the yields.

The choice you have is to lock in a slightly better yield for 9 months or take the lower yield for 3 months and hope that you can get a better yield 3 months from now.I think the 9 month CD is a better bargain, but that is just my guess on future CD rates.

Answer 3

A --because you are guaranteed 4.75% for 9 months not just 3 months in the B choice.

Answer 4

Obviously the 5%.

But why would you want a CD at 5% anyway? Open an HSBC or Countrywide Online Savings Account. You can get 5.05% with HSBC or 5.25% with Countrywide with $10,000 or more, or you can get 5.4% with Countrywide with $50,000 or more. And it is a savings account so you can deposit or withdraw any time unlike with a CD.

Steven F: I see why it is not obvious. A lot of people think that something like 5% for 9 months means that you get 5% interest after 9 months. I meant it is obvious from the perspective of someone like me who realizes that 5% for 9 months is not the same thing as 5% for 12 months and that you would have more interest paid with 5% for 12 months and that you don't get 5% interest after 9 months, but you get about 3/4 of that. But yes, I understand what you are saying.