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Brokered CD's
Old 09-10-2013, 06:50 AM   #1
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Brokered CD's

I am getting ready to buy a CD and noticed Fidelity has brokered CD's at around 3 percent for 10 years. Would like to know the downside of a brokered CD instead of a regular CD . I wouldn't need to close the cd early.
Thanks
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Old 09-10-2013, 06:58 AM   #2
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With a brokered CD I think you would have to sell it rather than close the CD early. There is a ready market for old CDs and you can see many on the Fidelity site unless your search is limited to "new." The prices can be above or below the nominal $1,000 CD increment. When they are redeemed at maturity, you get the nominal value and not what you paid. If involved in a default, the FDIC will also give you the nominal value. In both cases, the cash magically appears in your Fidelity account.

I have my fixed income primarily in brokered CDs through ETrade. I'm limiting my CDs to 2 yrs based on my belief that the interest rates can't/won't be manipulated forever.
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Old 09-10-2013, 07:30 AM   #3
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Schwab currently has some 10yrs @ 3.25%. I think the biggest issue most need to be aware of is you can't just redeem the CD. If you want to get out early, it is sold on the secondary market at current price conditions. Make sure you read the disclosure agreement for purchasing CDs. They carry the FDIC insurance and limits also.
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Old 09-10-2013, 08:53 AM   #4
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The CD could be liquidated early, especially if the bank is taken over by another bank. This is a pretty good rate for 10 years, you might want to check out the rating of the bank issuing the CD through Bauer Financial or Bankrate.

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Old 09-10-2013, 09:20 AM   #5
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I don't know why you would go the 10 year route. I would not go any longer than 5 years.....YMMV.
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Old 09-10-2013, 10:31 AM   #6
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Why would you buy a 3% brokered CD when you could purchase 10-yr US Treasury notes at 2.95% and pay no state income tax on the interest?
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Old 09-10-2013, 12:29 PM   #7
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Originally Posted by FIRE'd@51 View Post
Why would you buy a 3% brokered CD when you could purchase 10-yr US Treasury notes at 2.95% and pay no state income tax on the interest?
Let me guess...because he fears that 10 yr rates are going up, and he fears loss of market value in the T-note?

I have no opinion on this thesis short term, but if this is his reason OP should buy his CD at a bank so he can just cancel early if rates do go up.

I bought a small amount of 10 year notes around 2.8x, expecting a bounceback. It didn't come and I exited quickly for a small loss.

IMO it is very hard to impossible to know what is happening. It sure seems that everything points to rising rates, but that is a very popular opinion which fact alone makes me wonder.

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Old 09-10-2013, 01:13 PM   #8
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The prices can be above or below the nominal $1,000 CD increment. When they are redeemed at maturity, you get the nominal value and not what you paid.
My understanding is that if the CD is held to maturity you would get the $1,000 face value + interest earned irregardless of the movement along the way. Am I wrong?
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Old 09-10-2013, 01:28 PM   #9
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My understanding is that if the CD is held to maturity you would get the $1,000 face value + interest earned irregardless of the movement along the way. Am I wrong?
You are correct. A CD is redeemed at it face value. Buying a CD with a yield above the current rate will cost above the face value. A CD with a yield below current rates will be discounted.

Interest, however, can be paid at maturity, semi-annually, quarterly, bi-monthly and monthly. Some CDs have floating rates that change at different times based on other economic metrics. I've seen these based on CPI and Libor. You have to look at the CD details.

The difference between what you pay for a brokered CD and what you receive is a taxable gain or loss. You would include any commission into the purchase price. Of course, this only applies if you are holding the CD in a taxable account.
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Old 09-10-2013, 01:53 PM   #10
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My understanding is that if the CD is held to maturity you would get the $1,000 face value + interest earned irregardless of the movement along the way. Am I wrong?
But... the same would be true of a 10 year treasury if you hold it to maturity.
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Old 09-10-2013, 02:14 PM   #11
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You are correct. A CD is redeemed at it face value.
Thanks.
The OP mentioned that he was holding to maturity. The reason to consider a brokered CD over a bank CD is the better yield. Banks usually quote APY. In a tax deferred account it is more convenient to build a ladder with the brokered CD's plus advantages of the secondary market as you explained.

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But... the same would be true of a 10 year treasury if you hold it to maturity.
Thanks
Again for better yield - I recently picked up a 3.35 10yr in the secondary market (tax deferred)
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Old 09-10-2013, 03:25 PM   #12
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If you plan to hold to maturity and have that long a time horizon, another alternative is Guggenheim BulletShares® 2022 Corporate Bond ETF (ticker: BSCM) whose current yield would be about 4% based on the bid/asked midpoint, albeit with more credit risk than a CD or Treasury.

2022 is the longest version currently available. I own the 2019 and 2020 versions as a mid-term CD substitute.
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