Q. I've seen banks offering 7% on a 7 month CD with a maximum of $700. Does it make any sense having a CD for only $700 when I'm looking to deposit $50,000? Why would banks do this? What's the point of wasting paperwork for $700 when I want to open an account for $50,000?
A. The 7% rate is simply a promotion to get your attention--and it looks like it did. However, you are right to question the value of CD rates with a low maximum deposit.
A 7% rate is well above the current level of CD rates, so while the bank wants to have the offer out there for promotional reasons, they want to limit account sizes because they could not afford to pay 7% on large deposits.
You might see similar promotions with savings account rates or money market rates, and in all cases you need to focus more on the rate you would earn on the bulk of your deposits, rather than on the "teaser rate" that is offered to attract attention.
For example, 7% is about 6.5% higher than typical CD rates on a similar instrument. That extra 6.5% would be worth $45.50 per year on a $700 investment (less if it's only good for 7 months, but since interest rates are quoted on an annual basis, this example will used annualized figures). That's not bad, but it only amounts to 0.091% of your intended deposit of $50,000.
So, all things being equal, you might consider the extra $45.50 worth the additional paperwork. However, if you can find other CD rates that are 0.091% higher than the rate you'd be getting on the remainder of your deposit, those other rates would actually be a better deal.
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