cgrullon said:
The vanilla "investment" certificates can be redeemed at any time prior to maturity with a penalty equal to all earned interest.
This is not entirely correct. Certificates of Deposit that can be redeemed prior to their maturity date are penalized but not for the ENTIRE amount of interest paid upto the pre-payment date. Included as part of CDs that allows early redemption (cancellation), a time table of pre-payment penalties is included. The penalties are usually expressed as a percentage applicable to the capital for the time the bank actually controlled it. The penalty you'll need to paid in real money is the difference (spread) of the applicable interests under the pre-payment condition and the actual amount of interest paid upto the CD is redeemed.
Here is an example using the current terms offer by Banco Central of CDs that allow early cancellation and incur prepayment penalties:
PLAZOS Y TASAS DE INTERES:
Plazos Tasa de Inter?s Anual
30 d?as
10.0%
90 d?as
11.0%
180 d?as
12.0%
365 d?as
14.0%
TABLA DE PENALIDAD:
Rango de Plazos
Tasas de Inter?s anual
De 31 a 89 d?as
10.0%
De 90 a 179 d?as
11.0%
De 180 a 364 d?as
12.0%
Source: Banco Central -CERTIFICADOS_INVERSION
Suppose you get a CD today for RD$1,000,000 - 90 days @ 11% - 365 days/year - interest payable monthly.
The bank will pay you April 3, 2006 : RD$ 9,342.47. Your next schedule payment is on May 3, 2006 but say on May 18, 15 days later, you decide you need your money and cancel your CD. According to the prepayment penalty your capital now has a 1% reduction on the interest earned (or 1% cancellation fee). This is how the math looks:
Actual interest payment for 90 day term completed:
$1,000,000 * ((0.11/365) * 90) = $27,123.29 (Total interest for 90 day term)
Under early cancellation 46 days into the 90 day term:
$1,000,000 * (0.10/365) * 46) = $12, 602.74
Since one month of 31 days interest has already been paid it needs to be subtracted from the above amount; that'll leave $3260.27 to be paid to you. If the CD had been canceled on the exact date of the second month payment any interest overpayment will be deducted from the capital in the case of a 60 day cancellation $1643.84 would be deducted from the capital assuming 2 monthly payments have been made and each month containing 30 days.
NotLurking