Monday, September 8, 2008

Best Local CD Rates Compared

Copyright © 2008, Greenwich Financial Management Inc., a registered

investment advisor.

Last week, we discussed the best CD rates available nationwide through Internet
direct banking. I received responses from some readers that they appreciated
the article but would prefer to see the best available deals available locally. Some
of my respondents are not accustomed to Internet dealing and understandably
prefer to have a relationship with a local bank.

On September 5th and 6th, I drove to a number of local banks to ask for their
CD quotation sheets. Fortunately, I found that local rates are quite competitive.
Also, the local banks in many cases have smaller limits for investment size versus
the Internet direct banks. As with our national examples, all quotes are for FDIC
insured deposits.

Best Local CD Rates (APY %)(9/6/2008)

3 6 12 18 24 36 48 60 Min

Term
(months)

Bank of 1.25 1.35 3.15 2.95 3.05 3.35 3.45 3.75 small
America

Bank of 3.00 3.50 4.00 3.25 4.25 4.50 4.00 5.00 $1,000
Greenwich

2.20 2.00 2.00 2.00 3.25 3.50 3.80 4.00 $500

Citibank

Greenwich 2.50 2.95 2.50 2.75 3.00 3.00 3.50 $500

Bank & Trust

1.50 2.00 2.25 2.25 2.50 3.00 3.00 3.00 $1,000

JP Morgan
 Chase
2.50 2.50 2.00 2.75 3.25 2.50 3.00 4.00
People's Plus Plus Plus Plus Plus Plus Plus Plus small
United Bank Acct Acct Acct Acct Acct Acct Acct Acct
4.00 (7
4.10 4.50 5.35 small
Wachovia mos.)

Best National 3.50 4.02 4.35 4.45 4.50 4.71 5.00 5.15 $10,000
Rate

Generally speaking, Wachovia is offering the highest yielding CD’s in our area.
Their two year quote matches the best available on the Internet, and their five
year quote exceeds it. Wachovia’s well-known travails with subprime mortgages
may be putting some pressure on funding. The quote sheet I received at their
Glenville branch (220 Glenville Road) did not show all maturities, but for the
terms quoted, the bank offered the highest rates in town. I also happen to like
Wachovia’s service, as the staff is unfailingly polite, and the bank has rightly won
awards for customer service. There is another branch, on 28 Havemeyer Place,
kitty corner from the Greenwich police station.

A close runner up for rate champion is the Bank of Greenwich, on 165 Mason
Street. This is their only branch currently, though they are about to open a
second in Cos Cob. Their level of service is also excellent.

Here are some definitions: A "certificate of deposit" ("CD") is defined as a time

deposit, usually 30 days to 5 years, but sometimes up to 10 years or longer, that
is issued by a bank and insured within statutory limits by the Federal Deposit
Insurance Corporation (FDIC), and independent federal agency backed by the
full faith and credit of the US Government. These money market instruments
generally are subject to a penalty for early redemption. They are sometimes
quoted as a "discount to par," but they are more validly compared by "APY," or
Annual Percentage yield. APY is defined as the annualized compound yield on the
deposit. APY takes into account the effect of making money upon money, which
is the nature of compound interest. For two identical discount yields, the APY will
be higher for the one with a more frequent compounding period. An "early
redemption penalty" is a deduction from proceeds of a CD deposit for premature
withdrawal; these are sometimes referred to as "prepayment penalties," by
analogy with consumer liabilities such as mortgages, but this is a misnomer.

Special note on early redemption penalties: The early redemption penalty for
CD’s is usually computed according to changes in interest rates subsequent to
purchase. If CD rates have risen, then the bank will suffer a disadvantage if you
redeem early, as they will need to replace your deposit by offering a higher yield
to a different depositor. This is the economic basis for charging you a penalty.
The greater the time between redemption and contractual maturity, and the
greater the rise in interest rates since inception of the CD, the greater the
potential penalty. Such early redemption penalties can in some cases, depending
on circumstances and the formula applied, be greater than interest earned.

Special note on the interest rate yield curve: The graphic representation of yields
running from short to long maturities is referred to as the "yield curve." In the
present market, the yield curve is said to be "flat," which means that there is
relatively little increase in yield for extension of maturity. A "normal yield curve"
is positive, that is, upward sloping, based on the expectation that an investor
should receive a premium for such extension. When short-term rates are very
high, but where inflation--and thus rates--are expected to decline in the future,
the yield curve may "invert," showing a negative slope at least for some portions.
Decisions on the optimal term structure for your CD investments involve subtle
judgments about the future course of interest rates. Ultimately, though, even
expert opinion in this area is highly fallible, for the future course of interest rates
is in part unknowable. One compromise solution is to construct a "ladder" of
different maturities for investment. Your investment advisor will be familiar with
this concept and can assist you in constructing such a ladder.

Andrew Szabo CFA is managing director of Greenwich Financial Management

Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail
Szabo@GreenwichFinancial.com). For more information, please visit
http://greenwichfinancial.com/.