CD Rate Comparisons



Posted: Wednesday, December 28, 2005

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Generally, investment in certificate of deposits and money market mutual funds are helpful to people for short-term objectives such as buying a car, a house, etc. These types of investments will not provide any quick incentives but will provide highly secured income. Money market mutual funds (MMMF) are open-ended short-term debt instruments with a maturity period of usually less than a year.

When choosing the required source of investment, an investor will compare CD rates and rates of interest offered by money market mutual funds. Usually the Average Percentage Yields (APY) are higher on CDs compared to MMMFs. Annual Percentage Yield is the effective annual rate of interest earned for the instrument without considering the frequency of compounding the interest amounts along with the opening balance of the instrument. Taxable money market mutual funds pay lower rates of interest then CDs. However there is an advantage with respect to MMMFs, the investor’s money is not locked in for a long period. With CDs, the investor cannot withdraw the money before the maturity period, but those investors who wait until the CD matures earn a reasonable and secured rate of interest. Sometimes one may find MMMFs rates close to CD rates, especially online. MMMFs are not insured instruments like CDs.

CDs earn the same interest rates as Treasury Bills. If the two-year Treasury Bill pays a good rate, then CD rates will also pay well and vice-versa. A Treasury Bill rate is interest paid on a bill of exchange issued by the Government. When rates of Treasury bills are down, shorter-term CDs are recommended until the rates improve because of the latter’s non-risky nature.

One can also compare CD rates among different types of CDs themselves. The philosophy is that CDs having higher maturity periods pay higher rates of return. Since APY measures the actual interest earned per year by an investor, he can use it to compare CDs of different interest rates and compounding frequencies.
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