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Brokered CDs: Are They Worth Using?

Monday, June 17, 2013 - 6:36 PM
In addition to Ken's excellent Blog article, Risks of Brokered CDs,
here's some additional worthwhile notes on this product.

Read more:
4
cumuluscumulus297 posts since
Jan 16, 2010
Rep Points: 1,368
1. Monday, June 17, 2013 - 6:56 PM
Interesting article but is basically the same info as others.  There is only so much one can learn about brokered CDs.  One thing I know is that for some reason the brokers I use for the IRA CDs have really crashed their rates even lower than what is on the going market.  This is one of the set backs I find with having an IRA with a brokerage and using CDs.  You are stuck having to take whatever rates they offer.  I have never purchased CDs off of the secondary market.  I only get New Issues. Other than the lower rates on CDs these days, I have not had any problem with buying brokered CDs from our brokerages.
3
paoli2paoli21,138 posts since
Aug 10, 2011
Rep Points: 5,076
2. Monday, June 17, 2013 - 10:45 PM
Paoli2, why only new issues and not purchasing them off the secondary market? Since you are buying them through your brokerage, is there any material difference?
2
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
3. Tuesday, June 18, 2013 - 10:47 AM
Lou:  Good question.  I plan on calling my brokerages today and ask them.  I just know when I first started many years ago, I had a good reason why I programmed myself only to buy new issues.  I have forgotten what that reason was so I would like to find out.  I know if you look at the CDs listed it is easier to know what you are getting with new issues for the interest rate etc.  If you look at the secondary market, it is not as easy because these are people trying to sell their CDs and get as much as they can for them.  I think it is more to it than that so I want to find out why I made that decision many years ago.  Thanks for reminding me.
1
paoli2paoli21,138 posts since
Aug 10, 2011
Rep Points: 5,076
4. Tuesday, June 18, 2013 - 11:42 AM
Lou:  I just got my info from our broker and know why I stick to Primary Issues.  It takes figuring out what you are really buying with Seconday Issues.  It may look like a 3% 5 year CD but the market evens it out and what you end up paying for it means you are really getting it for whatever the going interest rate is in the market at the time you buy it.  You would be paying more for it so that you would not get a 3% CD.  The buyer may lose out because if he is trying to sell a 3% CD at a time they go down the best price he could get would be less than his 3% or what he paid. He would be losing out on what he paid.  This is why I stick to primary issues.  They are risky if you have to sell because one never knows what the market will be.  Since I am basically going to be paying the same and both CDs would end up giving me whatever interest rate is at the time I buy, it is easier just to pick what I want from their group of Primary CDs.  No figuring out the math.  They both are FDIC insured and can be sold again on the Secondary Market "if" you can get a buyer at the time.  Why hassle with the secondary market if it can't get me a higher rate.

Also, the broker reminded me that secondary CDs are not always sold in even dates depending on the time the seller is selling.  If he has a 5 year CD and tries to sell it after 2 1/2 years, you would be buying a 2 1/2 year CD since that would be the time left on the CD etc.

I'll stick to the primarys.
2
paoli2paoli21,138 posts since
Aug 10, 2011
Rep Points: 5,076
5. Tuesday, June 18, 2013 - 1:43 PM
Paoli2, I think your broker is not entirely accurate. When you buy a CD or a bond on the secondary market, it is true that the price for the security could be more or less than the face value of the CD but ultimately all that matters is the current yield and the yield to maturity. Since you are most concerned with the interest income, the task is to find a CD with a current yield (coupon rate/ CD Price), maturity date and a yield to maturity (it should be disclosed) at the rate similar to what you would have received on a primary issue. This should not be too difficult and it would give you a much larger selection of CDs to look at.

Because you have a larger universe of CDs to select from and because some of these CDs on the secondary market could be mispriced in your favor, you may end up with a more favorable interest rate at a similar maturity. For intance, the primary issue could be 2% for five years but a secondary issue may have a current yield of 2.5% with a yield to maturity of no less than 2% for the same time period.
3
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
6. Tuesday, June 18, 2013 - 2:19 PM
Lou:  In deference to the broker, I think he was trying to explain the same thing to me that you posted.  However, he said I would have to figure out which one might be the better buy and do the math myself.  He felt if buyers don't want to do the figuring themselves then it is easier to just pick the CD off of the Primary Issues.  When I started all this in my "younger" days, it just seemed more of a hassle and not as simple as you make it so I stuck with Primary Issues.  He did state tho that if one is willing to do the math, sometimes, you can find a better deal mixed in with the Seconday Issues.  Thanks for clarifying this tho.
2
paoli2paoli21,138 posts since
Aug 10, 2011
Rep Points: 5,076
7. Tuesday, June 18, 2013 - 6:05 PM
Well, I think you're making too much of an issue with the math. The yield to maturity is always listed and the current yield is simple to calculate. Just divide the interest amount (coupon rate) by the price of the CD. If the yield to maturity and/or current yield is higher than a comparable primary issue, you're good to go.

When you buy these CDs, you can always use limit orders, where your order will not be processed unless you receive the price for which you're bidding.  If you bid a price less than the asking price, you can figure your yield to maturity with this online calculator.

http://www.bargainbininvesting.com/tools/yield-to-maturity-calculator.html
2
loulou521 posts since
Aug 3, 2010
Rep Points: 3,237
8. Tuesday, June 18, 2013 - 6:48 PM
Lou:  Even an old "Paoli" can always learn new tricks.  I don't like buying things I don't understand and never bothered to even try to understand the Secondary CDs since the broker felt it was easier going with the Primary ones.  After reading your post, it helps me understand it better and it doesn't really seem that confusing.  Thanks for the education.  I need to replace a couple of maturing CDs with this broker soon so maybe I can get a better deal with the Secondary ones.  I'll check out what they have available on their list now that I understand better how to go about it.  Much appreciation for your help.
2
paoli2paoli21,138 posts since
Aug 10, 2011
Rep Points: 5,076
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