A New Financial Instrument (I Think)

Essentially, it would be a CD that performs and trades like a bond. Suppose investor A invests in a 1-year CD at a 5% APY. The 6-month rate is, say, 2%. To keep numbers simple, let’s say that he invests $100, so that by the end of the year he will have accumulated $104. Now suppose that 6 months after investor A invests in the CD, interest rates fall and the bank is only offering 2% on 1-year CDs and 1% on 6-month CDs. Now investor A wants to sell his CD (including all principle and interest payments) to investor B. If investor A can get anything above $102, it will be in his best interest to sell (in 6 month’s time, he will have at least equalled the 6-month yield - as it was available to him 6 months ago - and he will have the advantage of having his cash liquid again). If investor B can buy the CD for anything less than $103.95, if will be in his best interest to buy since the CD is guaranteed to produce $105 in another 6 months. Anything more than $103.95 and investor B would be better off putting it in the current, 1% 6-month CD (because $103.95 * 1.01 = $105, the maturity value of the old CD).

Does something like this exist? If not, is this sort of thing feasible (not for a layman like me, but for established brokerages)?

Similar financial instruments exist already. I have CDs that can be sold before their maturity date. There’s no penalty for selling prematurely, although I’ll take a loss if I sell for less than the face value plus interest-to-date.

I don’t understand what the difference is between your CD that performs and trades like a bond and an actual bond? Accruing interest?

Would an Iron Maiden CD perform better than a Metallica CD?..

Agreed. How is what the OP described fundamentally different than a bond? I guess with this CD example, one could withdraw the money any time by accepting the early withdrawl penalty. But why wouldn’t you just sell your CD-bond instead and avoid the penalty?

Even with a straight up CD, you can enter into a contract and receive the present value in exchange for an obligation to give the future value at maturity. So no, there’s really nothing new here.

I suppose I don’t really have an answer to this. This was just an off-the-wall idea I had late last night.