Penfed 6.25% CD Strategy

By | January 2, 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?

3 thoughts on “Penfed 6.25% CD Strategy

  1. JLP

    If my math is correct, you will receive $42,544.60 in income over the 7 years in the first scenario.

    However, it sounds like you don’t want your money tied up for that long.

    The absolute best you could do is to buy the 7-year CD and let it compound, which would give you $152,863 in 7 years.

    If flexibility is important to you, you could hold out $28,571 and stick it in a money-market account, and then put $14,285 in each of the 3, 4, 5-year CDs and $28,571 in the 7-year CD.

    Just an idea.

    Good luck,

    JLP
    AllFinancialMatters

    Reply
  2. Smarty

    Whatis the everbank.com’s icelandic CD? Could you give me more info. Is it insured? What’s the catch for such high interest rates?

    Reply

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