Thanks to my colleague, Jessica, for letting me know about this phenomenon of a 10 year CD with an interest rate below a regular savings account. So, the question for your students is this:
Some good points for a discussion:
- Locking into a 10-year CD hurts your option value to invest in a CD with a higher interest rate which may appear as interest rates rise.
- Federal Reserve has announced that they will be raising interest rates sometime in 2015 for first time in over six years.
- You would only make the decision to invest in the CD if you believed that interest rates were going to fall so there was an advantage to locking in a higher interest rate NOW. Looking at this historical chart of T-bill rates (a proxy for interest rates on savings accounts) suggests that interest rates have no place to go but up.
- “Bricks and mortar” banks traditionally offer lower interest rates than online banks. Why? A very different cost structure.