Case Study:Should Depositor Break Fixed Deposit Before Maturity

Here is one real time case study.Fixed deposits have made few days back and now interest rates are higher than that time.Now depositor is confused whether break and renew the deposits or not.Details of deposit are as follows.

• Fixed deposit start date:Feb 25,2011.
• Term of fixed deposit:3 Yrs.
• Interest rate: 8.50%.
• Current interest rate:9.25% for 3 yrs.
• Fine for premature withdrawal:1%
• Fixed deposit principal:Rs. 5 lakh.
• Period of deposit completed till today: Nearly 10 months.
• Interest rate receivable for this period:6%.
• Net interest received for this period,after fine: 5%.

Now depositor is confused whether he should renew this deposit or not .

I have tried some calculation.One thing we should note that if he break deposit today then net rate of interest he receive will be:Interest rate applicable for 10 months applicable at the date deposit made – applicable fine.

= 6% – 1%

=5%

If he break deposit immediately,then he will receive approximately Rs.5,21,138 with interest rate of 5%.

Instead if he completed 12 months(i.e. 2 months more from today),then interest rate applicable will be 8%-1%=7% and deposit value comes to be  Rs.5,35,935.

Answer in terms of yes or no to this particular question is too difficult. currently interest rates can be considered at peak level and may be corrected from here.Also,investor can find himself at lower rates after completion of 3 yrs.

As depositor will get better interest rate after completion of 1 yr i.e.after 25th Feb2012,I think he should complete this period and think to renew his deposit after completion of 1 yr.What will you suggest to him?