I really haven't paid a whole bunch of attention to CDs until recently. I sit on the board of a governmental agency and met with the bankers for a year end review of our account. The decision the board had to make was where to put our money for a donation account. Isn't this the $64,000 question these days? Well placing it under the mattress wasn't an option, so we decided between a money market account and CD.
The money market account allowed us to access the funds at any time, but rewarded us with a much lower interest rate. The agency had no plans on spending any money until 2010, so a CD made more sense.
You would think the decision would be straightforward, but there were some perils. When we started analyzing the 6, 9, 12, and 18 month CDs, the spread was a mere 10 basis points. Why would you want to lock up your money for 18 months and receive essentially a fraction of a percentage in higher interest? Where will interest rates be going? In investing nomenclature, this is known as interest rate risk. Shouldn't an investor be rewarded for locking their money up for longer durations? As a board, we chose the six month CD and review where interest rates will be in six months. I don't have a crystal ball, but I am not sure how much lower they can drop.
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