New to CD's - what should I watch out for?

[Brook2]

I’m just learning about CD’s and trying to figure out if there is a checklist of things I should be wary of before I buy different ones. The only thing I can find so far - is to avoid callable CD’s. I’m flexible on time span and minimums. It’s just that some rates look too good to be true and I can’t figure out why. Are CD’s pretty straight forward, or a I missing some obvious pitfalls I should know about?

 

[njhowie]

The only thing I can find so far - is to avoid callable CD’s. I’m flexible on time span and minimums. It’s just that some rates look too good to be true and I can’t figure out why. Are CD’s pretty straight forward, or a I missing some obvious pitfalls I should know about?

The most important thing to be concerned with is that the issuing bank/CD is FDIC insured. 99.99% of the CDs through the brokerages are FDIC insured. In the past 15 years, I've only seen one, secondary market on Etrade's platform that was not FDIC insured and there were big red asterisks all over the place pointing that out.

Now, as far as avoiding callable CDs - I disagree with that. If the terms provide what you're looking for, then there is no reason not to purchase it. In the secondary market, at times, you can find some real gems and the folks who go by this rule of thumb avoid them and miss out...which is fine, for those who are happy with what they provide. If there's a callable CD with a coupon so low that it would never be called, then why wouldn't you buy it? It's "effectively non-callable" at that point. Let's say there's a 5 year, callable CD, with 1% coupon and yield to maturity of 6% - you pay 75 for it ($750 per $1000 CD). The bank will never call this CD...unless interest rates fall below 1%. So, again, why wouldn't you buy it?

 

[COcheesehead]

Decide what your goals are.

 

[Brook2]

The most important thing to be concerned with is that the issuing bank/CD is FDIC insured. 99.99% of the CDs through the brokerages are FDIC insured. In the past 15 years, I've only seen one, secondary market on Etrade's platform that was not FDIC insured and there were big red asterisks all over the place pointing that out.

Now, as far as avoiding callable CDs - I disagree with that. If the terms provide what you're looking for, then there is no reason not to purchase it. In the secondary market, at times, you can find some real gems and the folks who go by this rule of thumb avoid them and miss out...which is fine, for those who are happy with what they provide. If there's a callable CD with a coupon so low that it would never be called, then why wouldn't you buy it? It's "effectively non-callable" at that point. Let's say there's a 5 year, callable CD, with 1% coupon and yield to maturity of 6% - you pay 75 for it ($750 per $1000 CD). The bank will never call this CD...unless interest rates fall below 1%. So, again, why wouldn't you buy it?

Good point. I hadn't thought it through that far on the callable CDs. There is really no risk involved, correct? The worst that can happen is you might not be able to keep it as long as you expect at the rate you want. But you don't have to keep it at the low interest rate. And yes, I forgot about double checking the FDIC - just as a good habit to get into. thanks.

 

[wolf]

Just be aware of the differences between:

1. CD you purchase directly from bank/credit union.

2 Brokered CD. You purchase using, Vanguard, Fidelity, Schwab, etc.......

Different rules. Especially if you need to redeem the CD early.

 

[Car-Guy]

For me, now that CD's have started paying "something" again, it comes down to, (1) making sure they are FDIC insured, (2) making sure they are non-callable, "then" (3) picking the best rates I can get (4) for the term(s) I want. I also like only buying brokered CD's since I don't have to look for "and" deal with individual banks and I also like buying CD's that pay monthly. These days, I make enough in monthly payments over a year, that I can reinvest those funds in MM's or more CD's. But that's me, and other things may fit your interest/needs better.

 

[Northforker]

If you have a ladder of cds for every month 1
through 12, you can reinvest the maturing cd in a 12 month cd thereby levelizing your income stream. I also only buy monthly paying cds so that the interest is available sooner for reinvestment.

 

[NomDeER]

Now, as far as avoiding callable CDs - I disagree with that. If the terms provide what you're looking for, then there is no reason not to purchase it. In the secondary market, at times, you can find some real gems and the folks who go by this rule of thumb avoid them and miss out...which is fine, for those who are happy with what they provide. If there's a callable CD with a coupon so low that it would never be called, then why wouldn't you buy it? It's "effectively non-callable" at that point. Let's say there's a 5 year, callable CD, with 1% coupon and yield to maturity of 6% - you pay 75 for it ($750 per $1000 CD). The bank will never call this CD...unless interest rates fall below 1%. So, again, why wouldn't you buy it?

Good point. I hadn't thought it through that far on the callable CDs. There is really no risk involved, correct? The worst that can happen is you might not be able to keep it as long as you expect at the rate you want. But you don't have to keep it at the low interest rate. And yes, I forgot about double checking the FDIC - just as a good habit to get into. thanks.

It's going to depend on your goals. I generally don't buy callable CDs or bonds in my non-IRA accounts. Part of it is because, in certain accounts, I am investing for income, so I don't want the low coupons for CDs or bonds that are technically callable but won't be called because of their low coupon. For ones that are likely to be called, I don't want them because I want to be able to plan when I will receive my principle in those situations since I often have plans for that particular money at that time on my ladder. I also don't want the reinvestment risk. Also, I like the ease of just buying new issues.

However, I will buy callable bonds/CDs for my IRA, buying low coupon ones which effectively make them non-callable. That is because I don't care about the income since I don't plan to draw from them in years. For various reasons that may be fairly unique to me, I also don't care that much if the ones in my IRA are called, so I am willing to buy some callable bonds/CDs even if I think there is a decent chance that they will be called.

 

[GenXguy]

Big difference for tax filing with a matured brokered CD compared to a traditional bank CD. You have to show you your cost basis and such instead of just interest income. I found that out over 15 years ago the first time I had a brokered CD mature, filed taxes like I always had with regular bank CD's, then received a bill from the IRS, which I responded to in order to resolve.

 

[sengsational]

Even though they're all FDIC insured, if it's the same rate, why do with a "C" when you have an "A"? That is, if you believe the ratings.

This site was listed on another CD thread: https://weissratings.com/en/banks