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Secondary Brokered CD Question: Different APY For Same Coupon Rate CD?

maxpower1
  |     |   59 posts since 2020

A few days ago on TD, I saw wells fargo offering a 5 yr brokered CD with a coupon rate of 5.05%, with monthly interest, and the APY was ~5.169% as a primary offering.

That CD listing went away, but a few days later (still before issue date), I saw 5.05% rate 5 yr CDs with monthly interest from Wells Fargo on the secondary market listed with the same maturity date, but various prices including 99.75, 100, 100.5 etc...with various available amounts. The lowest price 99.75 did not list the APY as 5.169% like the primary offering, but it was 5.05% or just slightly higher (can't recall and site is down during transition). I was only able to buy the lowest price offer, which seems good for the buyer, so I payed $997.50 per CD I think.

My question is why is there a difference in listed APY from when it was a primary offering to the secondary offering if it has not even been issued yet? Will I still be receiving the exact same dollar amount of interest monthly as if I bought it from the primary offering? I expect to keep it until maturity and get back $1000 per CD. Or is the APY just listed differently for primary and secondary CDs at TDAmeritrade?

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Answers
MAKNYC
  |     |   323 posts since 2015
This is a guess. First off I have never seen a brokered CD that compounds interest. Regardless of payment frequency, they have always paid interest into the brokerage account holding them. If this is the case for your CD, there would not be a APY higher than the coupon rate if purchased at par. Coupon and yield would always be the same number. What I’m guessing happened here is that your brokerage firm committed to distributing a fixed/minimum amount of this CD. In the end they weren’t able to sell all of them, so they either bought the unsold balance for their account, or just lowered the price to sell the remaining balance. If this is what is happening here buying the CD at 99.75 would result in an higher APY. Although that too appears too low if it’s a 5 year instrument: .25/5=.05% incremental yield per annum (approx)
Regardless of the yield discrepancy, you should receive roughly $4.21 per month per $1000 notional as interest (($1000*5.05%)/12
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maxpower1
  |     |   59 posts since 2020
Yes, it does not compound but deposits the interest into the account. Yet, for every brokered CD they list at TD, there is a coupon rate and a separate APY, where it is always higher for monthly vs semi-annual vs yearly. I assume they are basing it on an assumption you can invest that interest sooner with more frequent payouts, but I don't know how they determine it, maybe on their very low interest rate they pay on account cash balances? Which still doesn't explain the secondary vs primary discrepancy though.
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w00d00w
  |     |   360 posts since 2012
it seems to me that the yield on a brokered CD can only be higher than the rate in a few circumstances: interest compounding (which as MAKNYC points out, i've never seen either), CD is being sold at a discount to par, CD offers a stepped coupon rate increasing over time, or CD has a par call option and is being sold at discount. perhaps there are other circumstances, but those are the main ones that come to mind.
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