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Overview Of Brokered CDs - Early-Withdrawal Rights

Tuesday, April 3, 2012 - 5:46 AM
This post at Bankaholic is a good but brief overview of brokered CDs. The author of the post is describing his experiences with brokered CDs as he manages his online brokerage accounts at Fidelity and Vanguard. One downside of brokered CDs is the lack of early-withdrawal rights. However, there are some exceptions, and of course, you can sell them on the secondary market (at a potential loss):
Unlike most CDs issued directly, however, most brokered CDs don’t provide early-withdrawal rights, except on the owner’s death or legal incompetence.

They’re transferable, however, and can be sold in the open market.

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Ken TuminKen Tumin5,442 posts since
Nov 29, 2009
Rep Points: 123,713
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.

  
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BozoBozo135 posts since
Feb 14, 2011
Rep Points: 917
2. Tuesday, April 3, 2012 - 10:00 PM
Excellent post, Bozo. I wonder if you can add POD's beneficiaries to these CD's. It sounds like you probably can't. The other problem is that although you may be able to sell the CD on the secondary market, many of these CD's are quite illiquid and rarely trade. So when the time comes and you want to sell, you may not be able to.
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loulou521 posts since
Aug 3, 2010
Rep Points: 3,239
3. Tuesday, April 17, 2012 - 10:21 PM
There have been some quite decent rates lately at Fidelity, including currently a call protected GE Capital 10 year CD with a 2.85 yield. Of course all the pluses and minuses of brokered CDs have to be taken into account. The interest payments can't be rolled back in, but that doesn't matter if the rate is right (compare it with the APY on CDs that do let you roll the interest back in). The fact that the interest pays into a money market account doesn't seem like a problem, since money can be moved right out and into another bank account.
2
leefleef19 posts since
Jun 24, 2010
Rep Points: 65
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