Tuesday, January 02, 2007
Penfed is currently offering 6.25% APY CDs for their 3 to 7 year terms. The rate is very attractive for an investment with virtually no risk. This rate is among the highest, if not the highest insured-rate in the nation. With interest rates expected to decrease in the future, it would be a good idea to lock in these rates. I want to maximize the benefits of these CDs. I have 100K to invest and I've come up with a few scenarios.
Scenario #1: Lock 100K in a 7-year 6.25% APY CD and have the interest paid out by check monthly. The idea is to have a recurring income.
Pros: Lock in high interest rate for the maximum CD term. Protected from future interest rate decreases. Income delivered my savings account every month. Principal is protected.
Cons: Sacrifice of compounded interest. Principal amount will be lock in for a long period, money is not accessible immediately and may result in loss of future investment opportunities if they arise.
Scenario #2: Lock 100K in a 3-year 6.25% APY CD and have the interest reinvested. Cash out CD at maturity.
Pros: Short term
Cons: If interest rates decrease a lot, I would lose the opportunity for high insured-interest-rates.
Scenario #3: Lock 25K each in a 3-year CD, 4-year CD, 5-year CD, and a 7-year CD, and compound interest.
Pros: Duration of CDs are spread out.
Cons: May not maximize interest earnings.
My idea in Scenario #1 is to create a streaming income investment vehicle by putting 100K in a CD and collecting interest each month. The downside is locking up 100K of cash. Early withdrawal is a steep 365 days of interest for the 7-year CD. I can put the whole 100K in a 3-year CD (Scenario #2), which would give me more liquidity but if interest rates come down in the future, I would lose the high inerest rate opportunity. The third option (Scenario #3) is a CD ladder and would give me better liquidity. Still, locking up 100K for at least 3 years without seeing any income from that investment is a tough decision. That brings me back to the idea of receiving a monthly check for interest and locking in the CD for the longest term, the 7-year CD.
Locking in 100K in a 7-year 6.25% APY CD and compounding interest would yield the highest interest, but that would made the 100K inaccessible for a long period of time and I can't afford that. There's always good investment opportunities out there and I don't want to be caught with money tied up. Also, I'm looking forward to buying an investment property in the near future, so I may need to tap into the money. What do you think is the best option for me?