I continue to search for add-on CDs to offer readers here. I’m very disappointed Ken has not featured them. God knows, given what is happening to interest rates generally, CD investors need add-ons and more choices, too, than just GTE.
I’ve been thinking about the Rising add-on and want to offer this analysis:
If you’re willing to accept 3% APY as your minimum “must have” bogie, then any yield below that can be looked upon as a cost. I’m doing this example at 3%, but if your number is different then you can adjust your personal cost accordingly just by re-doing my numbers.
OK, so Rising is only at 2.5% and they demand $25,000 of your money to buy in and potentially protect half a million $$ down the line, should rates fall. This is essentially insurance. It’s a three year policy which costs at most 0.5% of $25,000 per year. So worst case you’re out $750 across the three years.
As with any insurance you might never need the coverage, in which case you’re out $750 minus whatever tax you would have to have paid on that money had you actually received it in interest.
If interest rates over the next few years fall enough, then your insurance coverage offers you sanctuary for an additional $475,000. Of course if interest rates fall at all from here, your cost for the insurance you bought goes down. And, again, if your CD APY bogie is higher than 3% then the cost for this insurance is higher than in this example.
Ideally we want an add-on less costly than Rising’s offering, something with a lower buy in or with a higher interest rate, or both. Also, the longer the better. I would rather have a five year insurance policy than one that is only good for three years. But it’s no surprise there is some separation between what we want and what we can get.
ETA
Re-reading the above, I see I missed something. Interest rates are too unpredictable to ignore the following:
Though apparently today unlikely, there is always the chance interest rates could turn around and rise instead of remaining constant or falling. Should rates rise, it must be mentioned that the cost of Rising Bank’s insurance increases. We do not appear to be heading into a period of rising interest rates. But it could happen nevertheless.