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# 1-year CD Rates vs.

## 5-year CD Rates A Case Study

One of our clients recently rolled over a CD that they have held at the same bank since Feb 2000. They have primarily rolled for a 1-year CD Term; except for the last few years where they have extended a little to boost their yield a bit. With real data in hand, we can present an interesting study on what the client would have earned if they had selected 5-year CDs vs. the 1year. First, the below graph shows average 1-year and 5-year CD rates during February of each year since 1999. In most years, there is at least a 0.50% difference. Some years the difference was as high as 1.50% to 1.80%. A couple of years the difference was minimal, and although the graph doesnt show it, we even had inverted yields a couple of times (i.e, the 1-year was higher than the 5-year). However, just comparing rates, we get an average difference of about 1.00% (4.412% vs 3.420%)

Second, the next graph shows what the return would have been if the client had abandoned 1-year CDs for 5-year certificates of deposit. I even went back a year to 1999. In February of 1999, the average 1-year CD rate was 5.207% and the average 5-year was 5.604% (one of those times, where there wasnt much of an incentive to go long-term). In February of 2004 (5-years later), the average 5-year rate was 4.059%. In February of 2009 it was 3.313%. So the average return if they had done 5-year CDs was 4.337%. As stated above, the 1-year return was 3.420%. Looking at all of the opportunities to have switched, each 5-year series beats the corresponding 1year rates. Note: I estimated a 5-year rate of 1.25% and a 1-year rate of 0.60% for February 2013 for the last series starting with 2003.

Some interesting observations First, by extending their term a little the last few times the CD matured, the client boosted their average return to a 3.55%. Although that difference isnt