Can I Get A Premium Price On A 4% CD By Selling It In The Secondary Market?

jeremyharrison | Mar 12, 2020 | 56 posts since 2011

I have a $600,000 4% APY CD maturing in 4 years. Very nice. But how nice to a secondary buyer? As in - what would you estimate this $600,000 (now) 4-year CD would sell for?

My thought is that if I can get a good premium price from the secondary market, I can pocket that difference (the premium) - and put that $600,000 right into an add-on CD I have with 4 years left until maturiry - earning less (3.3%) over the next 4 years ($16,800 less over the next 4 years). Do you think my existing $600,000 4 year 4% CD would sell for substantially more than the $16,800 less than I would earn in interest over the next 4 years?

It strikes me that a 4 year 4% apy CD is VERY attractive - with the current top rate of 2.32% on 4 year CD's

Or am I missing something here?

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Answers

Bozo | Mar 12, 2020 | 1,375 posts since 2011

While I'm unaware of any secondary market for NFCU CDs, I did ask my wife what she might demand in a swap for our 3% 5-year with 4 1/2 years to run. Her gut response was telling: "a lot".

I suspect the recent stock market carnage has been a wake-up call. The benefits of diversification (especially for retirees such as we are) are even clearer.

Thanks to Ken and his great website for giving us all the tools and resources to prepare for this black swan.

Stay safe.

Regards,

Bozo

alan1 | Mar 12, 2020 | 877 posts since 2015

If you have a brokered CD, with a par value of $600,000 paying 4% and maturing in 4 years, I think you'd be able to sell some (or maybe even all) of it at a premium. I have a brokered CD with a 3.30% coupon maturing in about 3.5 years. A few days ago, the price was listed at a bit over 108.00 -- as a seller, I would probably get somewhere around 106; that's 6% over par. If your CD is a brokered CD, you can do the arithmetic as to whether it would be worth selling and putting the proceeds into your add-on certificate; and you could get a better price estimate from the brokerage than what I'm tossing out.

So, in this case, a brokered CD could turn out to be much better for the investor than a similar CD purchased directly from a bank or credit union. So, if it's a brokered CD, check the brokerage's website, or speak to someone at the brokerage -- things are changing rapidly in financial markets.

Of course, only brokered CDs can be sold in the secondary market.

If a CD is purchased directly from a bank or credit union, it's not marketable. It cannot be sold. It usually can be closed before maturity, and an early withdrawal penalty is likely to be imposed.

jeremyharrison | Mar 12, 2020 | 56 posts since 2011

The CD was purchased directly from a credit union. So...are you 100% sure that it cannot be sold? I truly appreciate the reply - if it can't be, you'll save me a lot of legwork discovering that for sure. Thanks!

pgroove_fan | Mar 12, 2020 | 168 posts since 2019

Here is the DA write-up on the two types of CDs

https://www.depositaccounts.com/blog/brokered-cd.html

alan1 | Mar 12, 2020 | 877 posts since 2015

jeremyharrison -- pgroove_fan beat me to the punch. One pertinent excerpt from the article cited by the groovester on the inability to sell a "direct CD" (as opposed to a brokered CD) is:

"Bank CDs are purchased directly from a bank, which is why these CDs are also sometimes known as “direct CDs.” There are no trading fees, all you need is enough money to meet your CD of choice’s minimum deposit requirements. In most cases, this is around $1,000, although there is a lot of wiggle room around this number if you shop around with different banks.

"There is no secondary market for bank CDs: You can’t buy or sell them. You will be the sole owner for the term of the CD. Instead, if you need to access your money early, you’ll pay an early withdrawal penalty fee to cash in the CD..."

While the article uses the term "bank CDs" as well as "direct CDs", it makes clear that the distinction is between "direct CDs" and "brokered CDs". CDs purchased directly from a credit union are no different than CDs purchased directly from a bank, for these purposes.

And thanks to pgroove_fan for posting the link.

jeremyharrison | Mar 12, 2020 | 56 posts since 2011

Thanks, Alan1 and pgroove_fan. You saved me a lot of research and wasted time. You guys rock, as does this site.

Choice | Mar 12, 2020 | 937 posts since 2020

Sounds like selling interests in CD(s). Not much different than a mutual fund. But they are securities under the security laws

Kaight | Mar 13, 2020 | 1,192 posts since 2011

I agree with posters who say a CD bought from a bank or CU cannot be sold per se. The only option I can conjure would be a negotiation, best held in person, with a sufficiently high ranking officer of the CU . . . a decision maker . . . wherein you would request to surrender your CD for more than its nominal value, owing to its favorable terms. Clearly such as that would benefit the CU significantly. Perhaps they might be willing to split their gain with you.

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