Author Topic: How does a brokered CD work?  (Read 1372 times)

Captain Cactus

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: The Land of Steady Habits
How does a brokered CD work?
« on: August 20, 2022, 09:01:51 AM »
I was looking on the Vanguard website and saw that they offer "brokered CDs".  For example, there currently appears to be a variety rates based on the amount of time the CD has left to mature.  The smallest appears to be around 2.5% and matures in 1-3 months.

What am I missing here?  What's the catch?

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1901
Re: How does a brokered CD work?
« Reply #1 on: August 20, 2022, 09:39:35 AM »
Not really answering the question but I'm about to do a T-Bill ladder directly from the treasury. The 4-52 week T-Bills have rates from ~2.1 to 3.2%. So, you can compare the CD to this to see if you're getting a good (appropriate) rate: https://www.treasurydirect.gov/instit/annceresult/annceresult.htm

Of course, if your holding period is >= 1 year you should max out I-Bonds first which yield 9.65% for the next 6 months (at least): https://www.treasurydirect.gov/news/pressroom/currentibondratespr.htm

Based on what you posted I don't think there's a catch, 2.5% seems to be in the appropriate range.

blue_green_sparks

  • Bristles
  • ***
  • Posts: 479
  • FIRE'd 2018
Re: How does a brokered CD work?
« Reply #2 on: August 20, 2022, 10:14:21 AM »
I was looking on the Vanguard website and saw that they offer "brokered CDs".  For example, there currently appears to be a variety rates based on the amount of time the CD has left to mature.  The smallest appears to be around 2.5% and matures in 1-3 months.

What am I missing here?  What's the catch?
They act are very much like treasury bonds. I have purchased several over the years. Instead of paying a penalty for early cash-out you have to sell them on the secondary market. If rates went down you may get a bonus, if rates went up you may have to sell at a discount. I have never tried to sell one. They are FDIC insured, indirectly up to 250K per institution. They payout periodically providing an income stream, so the interest is not reinvested back in the CD.

Oh, and some are "callable" on certain dates so that you get your principal and interest earned back sooner than the maturity date should the seller call it in; they often have the best rates to offset that risk.
« Last Edit: August 20, 2022, 10:23:08 AM by blue_green_sparks »

Captain Cactus

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: The Land of Steady Habits
Re: How does a brokered CD work?
« Reply #3 on: August 20, 2022, 10:36:21 AM »
Thanks all for your replies.  FWIW, I have already maxed out the I-bonds for this year.

Can one lose money on a brokered CD purchase?  For example, if I purchase a $10,000 brokered CD that matures in 1-3 months (around 2.5% interest rate), will I be guaranteed to keep my $10,000 plus whatever modest interest I get in that short amount of time?  Or is there some risk of loss since it's on the secondary market?

blue_green_sparks

  • Bristles
  • ***
  • Posts: 479
  • FIRE'd 2018
Re: How does a brokered CD work?
« Reply #4 on: August 20, 2022, 11:19:04 AM »
Thanks all for your replies.  FWIW, I have already maxed out the I-bonds for this year.

Can one lose money on a brokered CD purchase?  For example, if I purchase a $10,000 brokered CD that matures in 1-3 months (around 2.5% interest rate), will I be guaranteed to keep my $10,000 plus whatever modest interest I get in that short amount of time?  Or is there some risk of loss since it's on the secondary market?
They are safe; it's not placed on the secondary market unless you decide to sell and even if you did want to sell you can set a limit on the lowest price. Just avoid callable CDs if you want to be certain it will run till the maturity date.

jim555

  • Magnum Stache
  • ******
  • Posts: 3235
Re: How does a brokered CD work?
« Reply #5 on: August 20, 2022, 12:09:15 PM »
Thanks all for your replies.  FWIW, I have already maxed out the I-bonds for this year.

Can one lose money on a brokered CD purchase?  For example, if I purchase a $10,000 brokered CD that matures in 1-3 months (around 2.5% interest rate), will I be guaranteed to keep my $10,000 plus whatever modest interest I get in that short amount of time?  Or is there some risk of loss since it's on the secondary market?
If the rates go up the price goes down.  Not a problem if you hold to maturity.

clifp

  • Pencil Stache
  • ****
  • Posts: 890
Re: How does a brokered CD work?
« Reply #6 on: August 25, 2022, 02:25:35 AM »
Thanks all for your replies.  FWIW, I have already maxed out the I-bonds for this year.

Can one lose money on a brokered CD purchase?  For example, if I purchase a $10,000 brokered CD that matures in 1-3 months (around 2.5% interest rate), will I be guaranteed to keep my $10,000 plus whatever modest interest I get in that short amount of time?  Or is there some risk of loss since it's on the secondary market?

You can lose money, but you are very unlikely to lose a lot of money.
I manage my mom's money, she is in nursing home.  I like to have a years worth of expense in cash equivalents,and  she need $5k/month beyond her investment income+small pension and social security.
Right now the valuations of 3 CD are staggered through Feb of 2023. Is $9936, $9974, and $10,002. This despite a 150 point raise in the Fed rate since I bought the first one. I ignore the daily valuation and just let them mature and spend the money for her care.

slackmax

  • Handlebar Stache
  • *****
  • Posts: 1411
Re: How does a brokered CD work?
« Reply #7 on: September 27, 2022, 07:13:47 AM »
What are the fees and commissions, if any, if I buy a brokered CD with Vanguard?
Let's say, one CD for $10,000.   

Thanks