Stupid Question about CDs

[frayne]

I feel that I should know the answer but will confess to my ignorance. I recently bought a couple of CDs in my FIDO IRA. I noticed recently that the value of the CD has fallen by a few dollars. Anybody know, what gives here and what I might be missing ? Thanks in advance.

 

[kaneohe]

just a guess since it's been so long since I bought a broker CD..........guessing that they're trying to give you a market based value which moves depending on interest rates If you redeemed (sold) early you'd have to accept a market rate , not your face value. My broker held muni bonds are the same way.....they have a nominal face value but the market value is shown in the current valuation column.

 

[Car-Guy]

Fido, sounds like a real dog to me.

I've never seen a CD lose mosey unless it's due to an early withdrawal. Some might say they all lose money if you count inflation, but that's a different issue.

 

[GravitySucks]

Agree with Kaneohe.
My brokered CDs show a loss on Fido site when rates go up. Holding to maturity so I don't care.

 

[audreyh1]

Brokered CDs are marked to market. If you tried to sell it you would get the lower value.

 

[frayne]

OK, thanks everyone and that makes sense and I too hold them to maturity. Woof, woof car guy, LOL.

 

[wolf]

Broker CDs behave the same as bonds. Interest rates go up, value of Cd goes down.
Hold broker CD to maturity, get your principle back. (If you redeem broker CD early, you may get more/less then your original principle).

 

[Ready]

I've always argued that brokered CDs should pay a higher interest rate than bank CDs because of the inherit interest rate risk, but they don't. That's why I've never bought them.

To do a fair comparison, look at the best rate you can get from a bank, and look at the early termination penalty associated with cashing it out early. The penalty is essentially the interest rate risk for not holding it until maturity.

The reason I prefer this strategy is that it's generally easy to find banks that only charge a six month penalty on a five year CD. So if rates go up in two years, I cash out, pay them six month's interest, and reinvest at the higher rates.

You can't do that with brokered CDs. Hence they should pay higher rates. But they don't.