brokered CD interest question

[Earl E Retyre]

I wanted to validate my understanding of the way brokered CDs pay interest. At Vanguard (and I assume Fidelity and Schwab work the same way), the interest is simple interest and pays automatically into my settlement fund. So, if I buy a 5 year CD that pays semi-annually, then twice a year it would pay into my settlement fund. Then at the end of the 5 years (assuming I hold to maturity), I get the original principal back.

This differs from a non-brokered CD where the interest is put back into the CD and compounds.

Just wanted to validate my understanding (which may also help others considering brokered CDs).

Thanks!

 

[audreyh1]

Yes, with a brokered CD there is no option to have the interest accumulate inside the CD. Interest payments are sent to your brokerage account.

 

[Car-Guy]

^^^^^ Yes, audreyh1 is correct (as usual), and it's how I understand it too.

The info below in the blue text was cut and pasted from the Schwab CD FYI section and may be helpful too.


What is the difference between a brokered CD and a bank CD?

Schwab offers brokered CDs which can be resold through brokerage firms at the market price. If the client wants to redeem before the maturity, the price may differ from the original purchase price of CD, which may result in a gain or loss. Banks offer traditional CDs and often have you forfeit the interest payment to redeem CD early. Bank CDs cannot be held in a brokerage account and must be held in an account with that specific bank.

Why is the price of a CD online different than par; what I paid for it?

Clients see a matrix or evaluated price on their statements and online. This price reflects an estimate of the CD’s market value should the client sell their CD prior to maturity and does not reflect what a client will receive if he keeps their CD invested until maturity. The client will receive their initial investment amount plus the fixed rate interest per their original trade confirmation.

 

[Trooper]

I'm considering selling bond fund $ and buying CDs inside my Vanguard IRA. Do I have the same choices (brokered and bank) and what happens to the interest payments?

 

[audreyh1]

The interest payments are added to your core account just like any dividend would be if it were not reinvested.

 

[Mark1]

I'll make one additional comment concerning taxes on the brokerage CDs in a non-retirement account (at least at Fido). (Remember this is a non-issue in a IRA or 401K.)

When Fido sends out my statement at tax time, it shows all my brokerage CDs that came to maturity that year as "Long-term transactions for which basis is reported to the IRS -- report on Form 8949 with Box D checked and/or Schedule D, Part II".
It is a non issue since the 1d Proceeds and the 1e Cost Basis match exactly, but it is strange to me and some years this the only reason that I file a Schedule D.