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1) I assume my bank (Chase) isn't in the business of giving away money.
If they sell me a 4% CD, they must be sure they can make more than
4%... what do they do with the $$$?
2) Why do rates vary? The ones I was looking at were highest for a
7-month CD, then they dropped for longer terms. Can someone splain me?
advaTHANKSnce
s...@h...com writes:
> 1) I assume my bank (Chase) isn't in the business of giving away money.
> If they sell me a 4% CD, they must be sure they can make more than
> 4%... what do they do with the $$$?
Buy Treasury bills or notes or bonds, among other things. Low risk
stuff like that.
http://www.treasurydirect.gov/RT/RTGateway?page=inst
itHome
> 2) Why do rates vary? The ones I was looking at were highest for a
> 7-month CD, then they dropped for longer terms. Can someone splain
> me?
Because the investment vehicles where they stash the money vary.
--
Todd H.
http://toddh.net/
...@t...net (Todd H.) writes:
> s...@h...com writes:
>
> > 1) I assume my bank (Chase) isn't in the business of giving away money.
> > If they sell me a 4% CD, they must be sure they can make more than
> > 4%... what do they do with the $$$?
>
> Buy Treasury bills or notes or bonds, among other things. Low risk
> stuff like that.
>
> http://www.treasurydirect.gov/RT/RTGateway?page=inst
itHome
>
>
> > 2) Why do rates vary? The ones I was looking at were highest for a
> > 7-month CD, then they dropped for longer terms. Can someone splain
> > me?
>
> Because the investment vehicles where they stash the money vary.
Oh as for the rate dropping for the longer terms, yeah that's screwy.
It's because the yield curve is inverted/negative right now.
http://en.wikipedia.org/wiki/Yield_curve#Inverted_yi
eld_curve
See how the longer terms are lower than shorter terms for 1/17?
http://www.ustreas.gov/offices/domestic-finance/debt
-management/interest-rate/yield.shtml
Or graphically
http://finance.yahoo.com/bonds/composite_bond_rates
Normally you see an upward slope to that curve where you get higher
yields the longer you tie up your money.
--
Todd H.
http://toddh.net/
s...@h...com wrote:
> 1) I assume my bank (Chase) isn't in the business of giving away money.
> If they sell me a 4% CD, they must be sure they can make more than
> 4%... what do they do with the $$$?
They loan it out. Banks are, fundamentally, in the business of gathering
money and loaning it back out again. The difference between the cost of
borrowing it (from you, as a CD) and loaning it out (as say an auto
loan, or credit card, or short-term business loan) represents their
profit. Think of all the different ways that you can borrow money
through Chase.
> 2) Why do rates vary? The ones I was looking at were highest for a
> 7-month CD, then they dropped for longer terms. Can someone splain me?
Well first it's an unusual time at the moment, where longer-term rates
are below shorter-term rates -- if you want to read the mundane details
google INVERTED YIELD CURVE. So that might explain why a 7-month CD is
the sweet spot.
Perhaps you mean that their 7-month is high relative to other banks, but
their longer-term CDs aren't competitive. This happens because different
banks do different things with the money, and choose to obtain deposits
in different ways. Maybe Chase has an above-average need for money that
they'll borrow from you for 7 months...because they'll use your money to
make loans that will be repaid in 7-months.
The full answer is much more complicated but that's the basic idea.
-Tad
it's a common misperception that CD rates are based heavily on the
yield curve or fed's interest rate decisions. indirectly they are
certainly affected by rate moves, but in reality CD's are a bank's
promise to pay you back. in return for borrowing your cash they also
promise you a nominal rate of return. a miniscule fraction of the cash
you give them goes to the FDIC who insures the bank in case they screw
up majorly and can't pay you back. the rest gets lent out to borrowers
(mortgage customers, for instance). at EVERY bank this is a
SUPPLY/DEMAND question. if a particular bank has a large demand for
mortgages and is successfully charging those clients 7% on the loaned
money, said bank can offer 5% to their CD holders and the bank takes
home the spread. if the martgage demand dries up, you will see the CD
rates fall. this is why every bank charges a different CD rate.
as a matter of economic protection, banks are required to hold a
certain amount of cash in their deposits relative to the amounts they
have lended out, which naturally gives birth to this supply-demand
relationship. banks offering higher than market interest rates on
their CD's are actually just broadcasting their need for capital due to
heavy lending demand.
hope this helps.
s...@h...com wrote:
> 1) I assume my bank (Chase) isn't in the business of giving away money.
> If they sell me a 4% CD, they must be sure they can make more than
> 4%... what do they do with the $$$?
>
> 2) Why do rates vary? The ones I was looking at were highest for a
> 7-month CD, then they dropped for longer terms. Can someone splain me?
>
> advaTHANKSnce
s...@h...com wrote:
> 1) I assume my bank (Chase) isn't in the business of giving away money.
> If they sell me a 4% CD, they must be sure they can make more than
> 4%... what do they do with the $$$?
They loan it to some other smuck for more than 4%.
>
> 2) Why do rates vary? The ones I was looking at were highest for a
> 7-month CD, then they dropped for longer terms. Can someone splain me?
>
It's called rate inversion, an uncommon phenomenon. Someone is
expecting rates to drop in the future.
> advaTHANKSnce
s...@h...com wrote:
> 1) I assume my bank (Chase) isn't in the business of giving away money.
> If they sell me a 4% CD, they must be sure they can make more than
> 4%... what do they do with the $$$?
>
Look at the rate if somebody wants to borrow money from the bank, you
will see the "spread"
> 2) Why do rates vary? The ones I was looking at were highest for a
> 7-month CD, then they dropped for longer terms. Can someone splain me?
>
Market changes very day. There is a so-called yield curve which more
or less governs the rates of different maturities.
> advaTHANKSnce
> > 1) I assume my bank (Chase) isn't in the business of giving away money.
> > If they sell me a 4% CD, they must be sure they can make more than
> > 4%... what do they do with the $$$?
>
> Buy Treasury bills or notes or bonds, among other things. Low risk
> stuff like that.
>
> http://www.treasurydirect.gov/RT/RTGateway?page=inst
itHome
>
>
In fact they do none of that. If they did banks wouldn't need to be
insured. Where do you think your LOC (or your credit card for that
matter) comes from?
<s...@h...com> wrote in message
news:1169145085.154473.258620@11g2000cwr.googlegroup
s.com...
> 1) I assume my bank (Chase) isn't in the business of giving away money.
> If they sell me a 4% CD, they must be sure they can make more than
> 4%... what do they do with the $$$?
>
They're not selling you a CD. You are loaning them the money at 4%. Then
they loan it out at higher rates - mortgages, car loans, credit cards, etc.
Elizabeth Richardson
"Todd H." <...@t...net> wrote in message news:84fya8dsng.fsf@ripco.com...
> ...@t...net (Todd H.) writes:
> Oh as for the rate dropping for the longer terms, yeah that's screwy.
> It's because the yield curve is inverted/negative right now.
That is an interesting explanation. Suppose the OP had asked: "Why is the
yield curve inverted/negative right now?" I would like to know the answer
to that question. Someone, I forget who, was once asked "Why does opium
induce sleep?" and the answer given was "because it contains a soporific
essence which has the property of inducing sleep."
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