Expert: Dr. Joseph de Beauchamp - 4/25/2005

Question
First, what is the difference between APY and interest rate? i'm looking into buying CDs and i see the following: 2.83 APY, 2.81 interest rate.

Second, currently Corus bank offers a 2.83% APY on a 3 month 10k+ CD, and 4.06% on a 1 year 10K+ CD.  At first i said 4.06! but now that i think about it, would it not be better to make 4 consecutive 3-month investments than to make a single 1-year investment?

ie: reinvest investment + dividends each 1/4
((((10k * 1.0283) * 1.0283) * 1.0283) * 1.0283) =
$11180.97

vs.

10k * 1.0406 = $10406

am i correct? are there any flaws with this logic?
thank you very much

ps. i'm perfectly aware that this advise comes 'as-is'

Vic


Answer
Vic,

Something seems off on the year to quarterly rate. I think you will find the one year rate close to the quarterly. I think the flaw is in the quarterly rate being far too low or the annual far too high. In theory, you would be better to let your money work over a longer period of time.

Dr. Joseph de Beauchamp