Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP
Posting-Version: $Revision: 1.6.2.16 $; site ima.UUCP
Path: utzoo!watmath!clyde!burl!ulysses!mhuxr!mhuxt!houxm!vax135!cornell!uw-beaver!tektronix!hplabs!qantel!dual!lll-crg!seismo!harvard!bbnccv!ima!johnl
From: johnl@ima.UUCP
Newsgroups: net.invest
Subject: Re: CD Advice
Message-ID: <109000003@ima.UUCP>
Date: Thu, 26-Sep-85 23:07:00 EDT
Article-I.D.: ima.109000003
Posted: Thu Sep 26 23:07:00 1985
Date-Received: Mon, 30-Sep-85 02:26:26 EDT
References: <10454@ucbvax.UUCP>
Lines: 30
Nf-ID: #R:ucbvax:-1045400:ima:109000003:000:1755
Nf-From: ima!johnl    Sep 26 23:07:00 1985


/* 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


Brought to you by Super Global Mega Corp .com