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I just learned about the "certificate of deposit" or CD. Looking at a comparison between the annual yields on these CDs across different banks, I was shocked to see that the yields on the CDs issued by the biggest banks are as high as the interest rate on their savings accounts (0.02% to 0.05%). But one of the major banks, know for its investment banking business, offers a CD with a whopping 2.5% yield.

  1. Why are CD yields as low as savings account rates?
  2. Is a 2.5% compared to a market average of 0.02% too good to be true? How could this bank possibly offer 100 times what the market is offering?

EDIT: The country is the US and this bank is GS Marcus.

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    Why are items at one store cheaper than those at another store? Ignoring real analysis (overhead, salaries, etc.), the store that wants your business offers lowers prices (make it up on volume). If someone is too lazy to shop for competitive prices then you don't get the best deal. Banks are similar. If they are looking to increase deposits, they offer a competitive rate. If not, they don't.
    – Bob Baerker
    Jul 15, 2018 at 11:12
  • I never thought I would see the day when a 2.5% interest rate was considered "too good to be true"...
    – user12515
    Nov 16, 2019 at 23:12

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Why are CD yields as low as savings account rates?

This is presuming that you are in the US, and you are looking at the CDs offered by very large banks such as Chase.

Chase currently offers (as of this writing) a 0.02% APY on most 12-month or shorter CDs, and a 0.01% APY on savings accounts.

These are simply not competitive rates. Ally offers CDs starting at 2.1% APY, and savings accounts at 1.75% APY.

Why are Chase's rates so comparatively low? Many possibilities:

  1. The large bank may have more money on hand than it can lend out. Having additional money deposited at that point does not actually generate additional revenue.
  2. Similarly, the large bank may feel that paying out the higher interest rate would cost more than the value of the business brought in.
  3. The large bank can count on business through its physical location from people who are simply unaware of other, higher offerings.
  4. The large bank can count on people to deposit money for reasons other than the interest rate (to ensure a minimum balance for private banking services, for instance, to have all of their accounts in one place, etc).

Is a 2.5% compared to a market average of 0.02% too good to be true? How could this bank possibly offer 10 times what the market is offering?

It is not too good to be true; there are many online banks that offer comparative rates for savings and CDs. The large banks are essentially playing in a different market with different goals.

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