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Old 08-18-2005, 12:13 PM
CRFSaver CRFSaver is offline
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Default Re: Stacking ING Orange CD's

http://www.bloomberg.com/markets/rates/

If you look at that link near the bottom you will see a graph. As you have seen with CD rates, a longer term CD will have a higher interest rate then a short term one on average. That Yield Curve is a graphical representation of that relationship. Horizontal is the term (1 month, 3 month, 5 years, 10 years, etc), and rates on the verticle axis. The relationship between those rates changes all the time. A steep yield curve will have the line be closer to verticle versus horizontal.

So here is how I would analyse it (this is a simple simple example). You can get a 2 year CD or a 1 yr CD. the 2 YR ihas a 4% rate and the 1 yr has a 3% rate. Now if you expect rates to go up 25 basis points in a year (lets assume parallel which means on every point of the curve the rate goes up .25%), find how much interest you would get for a 2 yr CD now or a 1 year CD now and a 1 YR CD with the higher .25% rate.

So I can do a 2 YR CD and make 80 dollars in two years or I can buy the one YR CD and another 1 yr CD a year from now and would only make 62.50. This is a very simple example and and probably not a very good example but wanted to show where it might be better off getting the longer term CD now versus waiting. It makes a bigger difference as you go further out. As I read this it is a terrible explanation!

This example used a 1000 dollars for the CD amount.
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