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Old 02-14-2018, 07:38 AM   #21
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foxfirev5 - do you use this ladder as a bond substitute in this current environment or your cash portion?
I have transitioned from total bond market funds (AGG, BND) to the CD ladder. Similar yield with lower duration. To complete my fixed holdings I also use corporate bond funds LQD and VCIT. For a little more risk I also have held DBLTX and PIMIX for several years. However the majority of my fixed holdings are in the CD's.
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Old 02-14-2018, 07:44 AM   #22
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I was just as excited as you when I first found the brokered new issue CDs. As I then learned about secondary market it took things to another level.

Best regards.
I had looked in the past and not seen offers that matched what I found directly. I guess this changes off and on.

How do you find out what fees are involved in the secondary market. Or is comparing yield to maturity all that matters?

It is true that the paperwork/online forms involved in buying a CD is a pain. And now that weíve frozen our credit buying from a new bank wil involve more hoops plus some expense.
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Old 02-14-2018, 07:47 AM   #23
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Thanks for the details. I read that if you buy secondary market CDs you get no compounding of interest? I guess the interest is just immediately paid out to you instead? Is compounding usually an option on new issue CDs?
Yeah, there's no compounding of interest in either case. The interest is deposited in your sweep or mm account. You have various options of monthly, semi, or annual payments depending on the terms. At least the Vanguard MM and Fido MM are paying something between 1.3- 1.5%.
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Old 02-14-2018, 07:53 AM   #24
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1. Because the rates on brokered CDs are generally higher. If I walk in to my local bank and look at the rate board, they are laughable...still under 1%.

2. Because buying through your brokerage account is as easy as clicking a few buttons. If you buy directly from a bank, it's generally more involved. Do it in person, there's paperwork and it can take 30 minutes. Do it online with a bank where you don't already have an account and it takes time.

3. Because you have enormously more options as far as the maturity date, and the type of CD (callable/non-callable, step, even zero coupon).

4. With brokered CDs, you have hundreds of banks you could buy through on one screen. It's easy to spread your money across many banks with minimal effort. If you have a large account, this comes in handy so as not to breech FDIC limits at any one bank.

5. If you want to buy CDs in your IRA or other brokerage account obviously it will be easier and/or required to do it through the brokerage.

6. If you buy secondary market CDs, rates are not fixed, it's what someone is willing to sell for. On any particular day I can find CDs yielding 0.1% to 0.25% over the equivalent maturity new issue, even after commission. Additionally, there are a couple thousand CDs available through secondary market at any point in time, so there is much more choice.

7. With secondary market CDs rates are updated in real-time. When you buy from a bank, their CD rates are updated maybe weekly at best. Most times it's less frequently.
In a nutshell it's simply more convenient. I don't like having multiple online bank accts to keep up with. I do have one additional acct with PenFed, but that's it. All my other cd's are through Fidelity.
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Old 02-14-2018, 08:03 AM   #25
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Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?
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Old 02-14-2018, 08:07 AM   #26
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Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?
On Fidelity, the majority are not callable.
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Old 02-14-2018, 08:08 AM   #27
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Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?
Most are not.
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Old 02-14-2018, 08:13 AM   #28
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1. Because the rates on brokered CDs are generally higher. If I walk in to my local bank and look at the rate board, they are laughable...still under 1%.

2. Because buying through your brokerage account is as easy as clicking a few buttons. If you buy directly from a bank, it's generally more involved. Do it in person, there's paperwork and it can take 30 minutes. Do it online with a bank where you don't already have an account and it takes time.

3. Because you have enormously more options as far as the maturity date, and the type of CD (callable/non-callable, step, even zero coupon).

4. With brokered CDs, you have hundreds of banks you could buy through on one screen. It's easy to spread your money across many banks with minimal effort. If you have a large account, this comes in handy so as not to breech FDIC limits at any one bank.

5. If you want to buy CDs in your IRA or other brokerage account obviously it will be easier and/or required to do it through the brokerage.

6. If you buy secondary market CDs, rates are not fixed, it's what someone is willing to sell for. On any particular day I can find CDs yielding 0.1% to 0.25% over the equivalent maturity new issue, even after commission. Additionally, there are a couple thousand CDs available through secondary market at any point in time, so there is much more choice.

7. With secondary market CDs rates are updated in real-time. When you buy from a bank, their CD rates are updated maybe weekly at best. Most times it's less frequently.
Pphhtt.. is that all...
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Old 02-14-2018, 08:20 AM   #29
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How do you find out what fees are involved in the secondary market. Or is comparing yield to maturity all that matters?
You buy these in increments of $1000. Often, there's a minimum purchase amount. For Fidelity, the fee is $1 per $1000. It's a little more complicated than looking at the yield to maturity on the search page. It doesn't include the fee. But, part way through the purchase, it will show you the yield including the fee. The effect of the fee on the yield will vary by the length of the CD. At first approximation, I believe the fee would ding your yield about .1% on a 1 year CD and .05% on a two year CD, etc.

On Vanguard, I'm not sure, but, I think the fee is $1/$1000 if you a Voyager or above and $2/$1000 otherwise.
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Old 02-14-2018, 08:20 AM   #30
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Things I like about brokered CD's

1. Higher rates
2. Easier to buy
3. Automatic redeems. (no rollover instructions needed)
4. easier to create a nice ladder
5. can buy from multiple banks w/ one account
6. can actually sell for more than you bought for if rates go down.
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Old 02-14-2018, 09:00 AM   #31
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Yeah, there's no compounding of interest in either case. The interest is deposited in your sweep or mm account. You have various options of monthly, semi, or annual payments depending on the terms. At least the Vanguard MM and Fido MM are paying something between 1.3- 1.5%.
Thanks. This could be an issue on those longer higher interest rate CDs.

If youíre paid annually, by not compounded - yuck.
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Old 02-14-2018, 09:01 AM   #32
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Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?
Yeah a concern for me too.

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On Fidelity, the majority are not callable.
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Most are not.

Thanks.
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Old 02-14-2018, 09:05 AM   #33
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You buy these in increments of $1000. Often, there's a minimum purchase amount. For Fidelity, the fee is $1 per $1000. It's a little more complicated than looking at the yield to maturity on the search page. It doesn't include the fee. But, part way through the purchase, it will show you the yield including the fee. The effect of the fee on the yield will vary by the length of the CD. At first approximation, I believe the fee would ding your yield about .1% on a 1 year CD and .05% on a two year CD, etc.

On Vanguard, I'm not sure, but, I think the fee is $1/$1000 if you a Voyager or above and $2/$1000 otherwise.
Thanks (I think).

So yield to maturity doesnít include the fee.

You have to initiate the purchase to see the effect of the fees for your effective yield.
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Old 02-14-2018, 09:09 AM   #34
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I took a quick look at the Fidelity web site and see that they are offering a 5 year brokered CD at 2.65%.

Looking at bankrate.com, I see Capital One is offering the same 5 year CD at 2.65%.

But there is a big difference. If I buy from Capital One and decide to terminate early, my penalty is capped at a fixed 6 months of interest. If I terminate early from Fidelity I have to sell on the open market. If interests rates rise (which they are predicted to do), I will likely pay a substantially higher penalty than six months of interest. For that reason, I would expect the rates of a brokered CD to be higher than a bank CD.

But for as long as I've been watching them, they never have been higher than bank CDs. People like the convenience of buying a CD from their existing brokerage account. But they generally look at shorter term CDs because it doesn't make sense to lock up your money at such low rates right now for five years. But if you buy direct from the bank, a 5 year CD is a great deal.

Even if you only hold the CD for one year and pay a six month penalty, you still earned 1.325%. And if you hold it for two years, you earned 2%. But if rates don't go up and you want to hold it longer, you will have earned more than the brokered CD.

I buy CDs to avoid interest rate sensitivity risk. CD interest is taxed at ordinary income rather than CG rates. Bonds are taxed at the lower CG rates but carry interest rate sensitivity. A brokered CD is the worst of both - interest rate sensitivity and ordinary income tax rates.
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Old 02-14-2018, 09:11 AM   #35
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Thanks. This could be an issue on those longer higher interest rate CDs.

If youíre paid annually, by not compounded - yuck.
Brokered CDs tend to compound either monthly or semi-annually.

Getting paid out as they compound can redound to your benefit in a raising rate environment. It appears we're in such an environment now.
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Old 02-14-2018, 09:13 AM   #36
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In bank products I believe you are comparing the APY among products. If you see a rate at a bank, it should be the compounded rate. The actual interest rate is lower than the compounded APY. At the brokers, the interest is not compounded. As I understand it, that just means the rate is a little higher to make up for the lack of compounding.

I don't buy secondary market CD's. Too complicated. I prefer to have only three parties to the transaction, me the bank, and the broker. Simple paper trail and more accountability.

ETA: Here's the Ally webpage showing the compounded interest rate for their CD's.

https://www.ally.com/bank/cd-rates/
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Old 02-14-2018, 09:24 AM   #37
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Brokered CDs tend to compound either monthly or semi-annually.

Getting paid out as they compound can redound to your benefit in a raising rate environment. It appears we're in such an environment now.
I thought someone just said brokered CDs didnít compound.

Did you mean they pay interest monthly or semi-annually?
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Old 02-14-2018, 09:25 AM   #38
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But there is a big difference. If I buy from Capital One and decide to terminate early, my penalty is capped at a fixed 6 months of interest. If I terminate early from Fidelity I have to sell on the open market. If interests rates rise (which they are predicted to do), I will likely pay a substantially higher penalty than six months of interest. For that reason, I would expect the rates of a brokered CD to be higher than a bank CD.
If you want to sell a brokered before CD maturity, you'll take an additional hit beyond the interest rate effect. There's a lot of friction selling on the secondary market.

It's probably a bad idea to buy these if you're not going to hold to maturity.
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Old 02-14-2018, 09:27 AM   #39
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I thought someone just said brokered CDs didnít compound.

Did you mean they pay interest monthly or semi-annually?
Yeah. My terminology was sloppy. It's what you said.
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Old 02-14-2018, 09:29 AM   #40
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Brokered CDs typically pay interest semi-annually into a sweep account. They are not reinvested.
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