Is Bank of America's Risk Free CD at 2.6% APY A Good Deal?

I've seen a lot of ads on tv recently for Bank of America's "risk free CD" so I decided to give it a look.

First, let me explain what they mean by risk free. The CD, like most CDs issues by banks is FDIC insured up to $100,000. What's somewhat unique about the CD is that it allows consumers to withdraw funds prior to maturity without being penalized. The penalty for removing a 9 month CD before maturity at Bank of American is forfeiture of 90 days of interest. On a 7 month CD the 2.6% APY is equivalent to a 2.57% APR. If you divide the 2.57% by twelve you get .21% yield per month. The CD compounds monthly. So, if you invest in the CD and think you might need to remove the money at some point, the ability to not pay the penalty will save you approximately .6% (.21% x 3 month penalty) in yield. In actuality, the dollars saved would be higher because we ignored the impacts of compounding.

But this brings up a bigger question. 2.6% APY is awfully low compared to some of the best 6 month cd rates or best 1 year cd rates. Dime Direct, a 4 star bank according to Bauer is offering a 5% APY 6 month CD and Washington Mutual (now JP Morgan) is offering a 5% 1 year CD. That's almost twice the yield.

If you want to invest the money at a high rate but keep the option of withdrawing the funds, there are a bunch of high yield savings and money market accounts that pay up to 4% APY. And you can even guarantee the rate in some of the money market accounts. Everbank offers a guaranteed 3-month rate of 4.65% on their money market. The rate then drops to 3.45% APY on deposits over $50,000 for a first year blended APY of 3.60% APY.

Overall, it's hard to get excited about Bank of America's Risk Free CD when the rate it pays is almost half that of the top rate banks. Until the rate comes up, we'd say enjoy the television commercials but look for a better rate elsewhere.