luria@ucbvax.ARPA (Marc Luria) (09/23/85)
I have a CD coming due this week. I know that I'm not going to get anything like the 13.8% annual yield it is getting. I want to think in terms of a year (when I finish school) or two (buy a house). I want to put it into something where the principal doesn't fluctuate ( I have some of these GNMA portfolio things from Merrill Lynch but they fluctuate too much) and I want something secure. One thing I was considering was putting it into some short term stuff for 3 months as interest rates may be up by then. Any advice `would be appreciated.
wmartin@brl-tgr.ARPA (Will Martin ) (09/25/85)
I, too, recently had a CD mature (happened to be an IRA CD, but that really doesn't make any difference). It is insulting what low rates are available these days, if you consider what the banks and S&L's are still *charging* people who are borrowing money! Guess it's time for my perennial net.invest question: Where can I get an investment vehicle that has the safety and convenience of a bank CD (I really do want to be able to forget about it -- I don't want to follow markets and make decisions), but that will PAY the prime rate as its interest return? Considering the spread between what most borrowers have to pay for money and the "official" prime rate, there is *plenty* of room for a bank or investment organization to pay "prime" as their dividend on incoming funds while charging regular market rates for loaned money, or getting the far-higher-than-prime returns that certain specific investments will provide. They can make their overhead and profit out of that spread. Even if that spread is only a few percent, if the amount is large enough that few percent can add up to quite a hefty chunk of money, quite enough to pay the managers and staff, plus overhead. Also, I keep reading that supermarkets operate on a 1% or 2% margin, and they certainly make enough money to keep going... Will Martin UUCP/USENET: seismo!brl-bmd!wmartin or ARPA/MILNET: wmartin@almsa-1.ARPA
johnl@ima.UUCP (09/27/85)
/* Written 3:19 pm Sep 25, 1985 by wmartin@brl-tgr in ima:net.invest */ > Where can I get an investment vehicle that has the safety and > convenience of a bank CD (I really do want to be able to forget about it > -- I don't want to follow markets and make decisions), but that will PAY > the prime rate as its interest return? Nowhere. There are two reasons. The first, more theoretical reason, is that bank deposits such as small (< $100,000) CDs are insured and the money that they lend out at the prime rate is not, and that the insurance is worth something. (If you don't care about insurance, try something like telephone company bonds.) The economic argument would run along these lines: If insured deposits paid the same as prime rate loans, everybody would put their money into insured deposits. Then, ceteris paribus (a phrase economists use while wildly waving their hands) the insured rate would drop since there are all these people lining up at the deposit window waiting to make deposits, and/or the prime rate would rise since there'd be all these other people at the loan window who want to borrow some money and the people who are waiting at the deposit window aren't interested in lending it to them. The real reason is that the prime rate quoted by most banks is a lie, and their best customers, the people for whom the prime rate was invented, really pay somewhat less than the nominal prime. But in answer to your question about reinvesting your IRA CDs in perfect safety at high yields, you might take a look at zero coupon (e.g. stripped) treasury bonds that mature in about 5 years. I hear that they are not as popular among institutions as longer term zeros, and so pay more. John Levine, former economist, ima!johnl