1. Tuesday, April 3, 2012 - 8:23 AM
The author's comment that "[A]ll that said, brokered CDs continue to baffle me" is telling. He also notes he has been "into" brokered CDs for just three months, so I guess he has yet to realize that his interest payments are not compounding.
Vanguard's site is quite clear in this regard (I don't know about Fidelity). Purchasers of brokered CDs are cautioned that interest payments roll into one's MMF or are paid in cash. They do not compound.* Given the current rate spread between MMFs (think just above zero) and CDs, this lack of compounding exerts a major drag on yield. While, theoretically, one could re-invest the interest in other, higher-yielding, instruments, as a practical matter, this is quite difficult. Plopping the interest into new CDs is frustrated by the minimum-purchase-amount requirements. Even without such requirements, re-investing in new CDs with the interest from the inception CD would require you to keep track of, well, let's just say an ever-multiplying number of very tiny CDs. You'd finally give up and sell all of them, with associated fees. Or, you could plop the interest in a bond fund. In a rising-rate environment, we know how that ends (not well).
The author should have done his homework before buying brokered CDs. To then blog about something that, by his own admission, he is "baffled" about, well, baffles me.
*Go to the Vanguard site. Click on the tab for "stocks, bonds and CDs." Click on the "CD" tab. Note the general comment to the right of "Consolidation." It notes that interest payments are swept. If this is too obtuse, click on the link further down for the CD Disclosure. On page one (of eight), in the right-hand column, the disclosure makes it very clear that interest does NOT compound.
Vanguard's site is quite clear in this regard (I don't know about Fidelity). Purchasers of brokered CDs are cautioned that interest payments roll into one's MMF or are paid in cash. They do not compound.* Given the current rate spread between MMFs (think just above zero) and CDs, this lack of compounding exerts a major drag on yield. While, theoretically, one could re-invest the interest in other, higher-yielding, instruments, as a practical matter, this is quite difficult. Plopping the interest into new CDs is frustrated by the minimum-purchase-amount requirements. Even without such requirements, re-investing in new CDs with the interest from the inception CD would require you to keep track of, well, let's just say an ever-multiplying number of very tiny CDs. You'd finally give up and sell all of them, with associated fees. Or, you could plop the interest in a bond fund. In a rising-rate environment, we know how that ends (not well).
The author should have done his homework before buying brokered CDs. To then blog about something that, by his own admission, he is "baffled" about, well, baffles me.
*Go to the Vanguard site. Click on the tab for "stocks, bonds and CDs." Click on the "CD" tab. Note the general comment to the right of "Consolidation." It notes that interest payments are swept. If this is too obtuse, click on the link further down for the CD Disclosure. On page one (of eight), in the right-hand column, the disclosure makes it very clear that interest does NOT compound.
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