High CD rates too good to be true

Don TaylorQuestionDear Dr. Don,
I see ads for brokered CDs that say they are paying 4 percent interest for a six-month CD. Since I can find no banks at all offering these types of CD rates, what is the catch? When I call the company they say I must go into their office to get the details. This is a red flag to me.
-- Doubting Dale

AnswerDear Dale,
It would be a red flag to me, too. It's likely they want you in the office so they can close the deal by using high-pressure tactics. If the investment can't bear scrutiny -- and can't be sent for your evaluation via a computer file or fax -- something is not quite right.

Investors may think they're earning above-market rates in CDs after being sold negotiable CDs where the interest rate on the deposits is high but the investors pay a premium to get that rate. This reduces the effective yield to the investor. Pay $10,100 for a $10,000 six-month CD paying 4 percent interest and your yield is less than 2 percent.

Banks don't need to borrow six-month money at 4 percent when they can borrow reserves at 0.25 percent. You can, of course, shop rates on Bankrate using its Rate Search feature to see the highest rates nationwide and in your market. If you see a rate substantially above what's on Bankrate, you're right to be cautious about what's being offered.

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