How Does Brokered Cds Work In Valuation?

Observer | Mar 24, 2023 | 8 posts since 2022

Bought a non-callable CD late last year, but not understanding how the interest is credited/added to the investment. Seems to behave more like a T-Bill than a CD, despite it being brokered or not.

Per my Vanguard Account, this is the purchase:

WELLS FARGO BANK NA SIOUX FALLS SD CD FDIC #03511 4.75% 12/16/24 12/14/22

OK. So I bought on 12/14/22, a $50k non-callable, brokered CD, that yields 4.75% and matures on 12/16/24. Fine.

On Vanguard, the first column is a type of current price as of such and such day. Ok. I guess this is more like par value of $100, but it says (today) $99.27. Not sure what this is, but fine.

Next column is a "Change" column. Here it says as of such and such day it is currently DOWN by $0.01. Ok, now this is looking more like behavior of a security.

Then, there is a percentage change, but that's just math, so I don't care about that.

Next is Quantity. Ok. 50k, just like I expected. Fine.

Finally is Current Balance. It says $49,632,65. ???? First time I've ever seen a CD that has lost value? What's going on? It's almost acting like a T Bill, where I put in (as an example) $50k, but actually buy it at a discount, and then at maturity, I get $50k. Is that what's happening here? If so, why? This wasn't bought at a discount, and I've never seen a CD (brokered or not, why would it matter) behave this way.

3

Answers

Marfa | Mar 25, 2023 | 68 posts since 2022

Regarding, vanguard brokerage cds . You will get your 50k back at maturity. Ignore the other numbers unless you need to sell them early in the secondary market .You will receive the interest payments , whatever they are, either monthly, semi- annually or annually(the interest and payment schedules were disclosed before you purchased them) , and those interest payments are automatically swept into your linked brokerage account.

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GH1 | Mar 24, 2023 | 1,053 posts since 2017

I believe what your seeing is the value of you sell CD early on secondary market. Hold to maturity you get amount plus interest. If you redeem a bank CD early you pay early withdrawal penalty. It's the brokerage showing you what your payout would be selling today. Mine do exactly like yours.

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MAKNYC | Apr 1, 2023 | 323 posts since 2015

Anything you see regarding a current valuation of a CD (price, daily change) is purely a theoretical model based valuation. Most brokered CD’s like most corporate and muni bonds (except for a handful of benchmark issues) don’t trade every day or in any meaningful quantity. Some won’t ever trade in the secondary market. So pricing services create theoretical valuations with inputs including maturity dates, coupons, call features, credit ratings, etc to provide some semblance of a current value. While well intentioned it cannot be relied upon for any detailed portfolio strategies, especially CDs which are likely to have the least liquid markets and wider bid/ask spreads of these relevant fixed income instruments.

And as others previously mentioned regarding a comparison with EWP CDs, depending upon your fact pattern you could be better or worse off. And selling a brokered CD for above par is possible, although that means rates have declined significantly from purchase.

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NFO | Mar 31, 2023 | 66 posts since 2022

https://personal.vanguard.com/us/content/Funds/FundsCertOfDepositOVContent.jsp

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Sardonic | Mar 31, 2023 | 34 posts since 2022

I've never used brokered CDs. Wondering how the secondary market works. If you could get $49,632,65, that would be better than being charged a 6 month EWP. I wonder how long it takes to sell a brokered CD.

1

DMC | Mar 31, 2023 | 46 posts since 2023

Depending on current rates, sometimes selling at the secondary market price turns out better than terminating an equivalent bank CD with an EWP. If rates are declining the price of the brokered CD on the secondary market may actually be higher than the par value.

The secondary market for brokered CDs is not nearly as liquid as treasurys. May take a while to sell. And the bid ask spreads can be wider.

I think an important point here is to make sure you understand what you’re buying before you buy it. There are a lot of other nuances to these brokered CDs and they’re not right for everyone.

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