An Interesting Investment Structure

Currently, Qwickrate and other listing services are offering long term CD rates over 2.0%.  The top ten 120 month (yes, that’s a ten year maturity) offerings on Qwickrate average 1.97%, meaning you could deploy as much as $2.5 million and pick up 1.75% over Fed Funds.  At this point, you should be asking “Why in the world would I want to lock in that low a rate for ten years, Jeff?”  The answer:  because the early withdrawal penalty is usually only a few months of interest, allowing you to cash in at will without substantial penalty.
When this investment idea first came up, I was uncomfortable with the idea of a banker taking advantage of another banker and breaking the terms of a contract.  The more I think about it, however, the more I like it.  The counterparty is, through the terms of his contract, selling you a put right as a part of the CD.  The cost of the put is the early withdrawal penalty, set by the seller.  If you were to employ this investment strategy, you would have to contact each institution to get a copy of the CD agreement, as Qwickrate does not list each institution’s early withdrawal penalty information.  I would also recommend making note of your intent to make an early withdrawal in your ALCO minutes to avoid examiner criticism.  We will model your embedded put option in our IRR model if you buy any of these long CDs.