CD Quoted Price Not $100

bobbi2018 | Apr 7, 2023 | 1 posts since 2023

Looking at list of CDs from online brokerage. All of them have $100 in the "price" category except for one, which had a slightly higher interest rate. The quoted price was $102.78. Any explanation why a $10,000 CD would cost $10,278 to purchase?

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DMC | Apr 7, 2023 | 46 posts since 2023

Brokered CDs on the secondary market can sell for above or below par, much like a bond. As you know, as rates decline prices rise and can even rise above par. Depending on the brokerage, the quoted yield may factor in the commission due or it may not so I would consider carefully whether you are really getting the yield you are looking for. You may also be “buying” accrued interest. If you hold to maturity a CD purchased above par you will be guaranteed to lose capital because you will only get back face value. And there can be some tax complexities associated with buying above or below par. Would suggest reading up a bit more on brokered CDs before purchasing (particularly on the secondary market).

w00d00w | Apr 7, 2023 | 360 posts since 2012

if the "for sale" rate on the brokered CD is lower than the rate of interest the CD pays, the price will be above 100 (face or par value). a CD that is being sold at a 4% rate but pays 5% interest will fit in this category. also important to know that any amount paid above 100 is not covered by FDIC insurance. In the example mentioned, $278 of that CD would not have FDIC coverage.

for a taxable account, to keep tax reporting straightforward, my preference is to buy only brokered CDs that are selling at 100. in a tax-deferred account, i'll also consider buying brokered CDs at <100

DMC | Apr 7, 2023 | 46 posts since 2023

The FDIC insurance point is an important one, but just curious how significant it is. If you purchase above par, and hold to maturity, you're guaranteed to lose that premium upon redemption. So in that scenario, there was really nothing to insure. And if you sell the CD before maturity, you'll get back whatever the market will pay and then obviously don't need to worry about insuring the CD after that.

But maybe you need to look at the premium above par as a kind of prepayment for higher future coupons and that is something of value that you would want to insure. So I guess if the bank fails shortly after acquiring the CD and before you've even been able to receive a number of coupon payments then all else equal you would have been better off investing the same money in a CD at par and then recovering the full amount from the FDIC upon any failure. Is that why it matters?

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