#### Earl E Retyre

##### Full time employment: Posting here.

- Joined
- Jan 1, 2010

- Messages
- 541

Like many, I believe interest rates will be lowered over the course of this year and so I have been locking in longer term CDs (e.g., 5-7 years) to as close to a 5% return as I can get. While I was able to purchase 5% new non-callable 5 year brokered CDs a little while ago, lately, when I look at new brokered CDs, I see the best long term rate I can get is only around 4.1% for a non-callable.

When I look at secondary brokered CDs, I have recently been purchasing CDs around a 4.7% Yield To Worst (YTW). I have been researching what YTW really means and learned that YTW is the rate you get if the CD never gets called (i.e., equivalent to the Yield to Maturity) - ASSUMING you are buying the CD with a coupon lower than the going rate (below par) which I almost always do. While 4.7% is the worst I can earn, if the CD gets called, I earn even more (and potentially a lot more).

So, here are 2 examples.

Yesterday, I purchased a LIVE OAK BANK CD at a YTW of 4.7% (coupon of 3.65%) that matures on May, 2032 (8 years). Assuming the CD never gets called then it will pay me the equivalent of 4.7% over the life of the CD. From a cash flow perspective, it pays me the equivalent of a 3.9% CD annually (since I purchased below par) but at the end when the CD matures and I get my principal payment, it will be the equivalent of a 4.7% annual CD. The main thing I recently learned was how to compute the Yield To Call (YTC) if the CD gets called prior to maturity. In this example, it would be as follows: if called after 1 year it would be 11.58% return, after 2 years it would be 7.62%, after 3 years it would be 6.33% and so on down to 8 years at 4.7%. So, while I prefer the CD doesn’t get called, if it does, I make out like a bandit. I think a coupon of 3.65% has a slight chance of getting called if rates decline rapidly, but in this case, I am happy either way.

As a second example using a shorter term CD and lower coupon, I recently purchased a JP MORGAN CD with a YTW of 4.64% (and a coupon of 3.05%) that matures on May 2027 (3 years). If the CD never gets called (which it most likely will not at such a low 3.05% coupon) then it pays the equivalent of 4.64% at the end of the 3 years. If it gets called after one year then it pays 15.56% and 2 years 9.25%. So again, in the off chance it gets called, then I get a really good rate.

I am pretty sure I am doing my calculations correctly since I read a couple blogs and created my own spreadsheet. Then I found an online calculator and plugged in the same CD values and it returned the same YTC, YTM, YTW numbers as my spreadsheet. But anyone please let me know if you think I am making any errors. Assuming I am correct, then I am really liking these brokered CDs on the secondary market and am just hoping the Fed does not lower rates over the next couple months since I have some more older, traditional CDs maturing. I used to look for a coupon in the low 3's to try and ensure they do not get called. But now I am thinking a rate in the upper 3's is ideal since it gives a greater cash flow, will still likely not get called, and if it does get called then I make an even greater return than going out to maturity.