Buying CDs Through a Brokerage

I’ve got some intermediate-term (Don’t need it yet, but will in several months) cash at a brokerage firm and would like to park some of it in something fairly liquid, very safe, and paying better than the amount I can get at a local bank CD. I’m posting here because I trust that you folks don’t have a vested interest in selling me your own product.

So I have a few questions:

  1. Some of the offerings on the “Search CDs” page list “FDIC Insured.” Some do not. The rates between them are about equal. If I invest in an FDIC-insured CD, am I protected against loss of principal?

  2. So a given CD might have a Coupon Rate of 4% but isn’t a new issue as we’re in November so it tells me it has a Yield To Maturity of about half that. That seems fair to me if it was originally a one-year CD. But since it’s a secondary CD, does that mean it might not be available to buy? How is it that they let people into the issue once it’s started?

  3. If I hold it to maturity, and I haven’t given any instructions to re-invest, auto-rollover, or similar terminology, what happens at maturity? Does the principal and accumulated interest just go back into the cash part of my account?

  4. If the CD is listed as “callable” and the bank calls it, same question about the principle: Would it just go into my cash part of my account?

  5. The value is listed at $100 with the price at $101.659. Does that mean I actually pay $101.659 instead of $100 and thus it eats into the actual amount of my return? Further, it tells me that the cost of the transaction would be $101.73. This is the set of numbers that confuses me most and I prefer not to put money into things where I don’t understand the numbers.

  6. Anything else you want to tell me about this? Warnings? Praises? Anything else I should know?

Let me modify #5 with some real numbers (that I got when I actually clicked the “Buy” button just to see what would happen). I haven’t actually invested anything yet, but let’s use $1000 as a hypothetical amount.

The description says it is a 4.15% CD
Maturity: 5/1/23
Coupon: 4.150
Price: 101.65900
APY-YTM: 0.735
Accrued Interest: 0.800
Estimated total: 1017.39

So how do I know how much my $1000 investment return on 5/1/23?

I believe, but am not sure, that you’re buying a seasoned CD – one that has already been issued. You’ll have to pay 1017.39 for it and you’ll get back 1041.50 next May 1st so your 6 month rate of return is 1041.50/1107.39 -1 = 2.37% or 4.74 annualized if it was originally a one year CD. But without knowing it’s original term to maturity. You need to know exactly how much it pays next May, and I don’t see that in the information. I’m disturbed that it lists a AnnualPercentageYield-YieldToMaturity of only 0.735% which is hardly compatible with what I figured here.

Yes, I cant get the math to work either.

I’m feeling the same way I did the first time I saw a Pai-Gow poker table: I think I’d like to play, but I dont want to put in my money unless I understand.

Still haven’t ever played Pai-Gow, btw…

If I were looking for something fairly liquid, it would not be Certificates of Deposit. Are these instruments tranches of CDs that can be bought and sold on an open market?

Well, as I said, I have several months so I don’t need absolute liquidity. But, so far as I can tell, I can sell them–possibly at a loss of a ome interest.

It’s been years since I bought a CD through a brokerage house. I believe that in theory I could have resold it at any time (just like stocks or bonds) but might have lost money - e.g. if I was selling my portion of a CD paying 4 percent, but average rates had gone to 6% in the interim, I’d have to sell at a slight discount - because otherwise why would anyone invest in MY CD at 4% when they could invest in a new one at 6%.

As far as FDIC insured: yes, that would mean they’d be investing it in a bank that offered FDIC insurance on its products.

There are some funny nuances there though. I know I’ve told before of helping close down some S&Ls (Savings and Loans) during the meltdown in the early 1990s. Some of these big ones had these HUGE accounts, with literally millions of dollars, which were placed by the big brokerage houses - who had pooled everyone’s money together. So you’ve got a million-dollar CD, basically, where 100 people each had a 10,000 dollar investment.

But the S&L had no idea who all had their money in. And the 100,000 limit applied to individual investors, not to the conglomerated CD - so it wasn’t like the FSLIC (RTC by then, actually) said to Merrill Lynch “Sorry, you gotta eat the 900,000 excess”. They had to get lists of all the individual investors and check THEIR balances against the 100,000 limit.

As an individual investor, John Q Public is insured for 100K at a specific institution. So let’s say he plays it clever and has Merrill Lynch invest 100K in one CD, and another 100K with Smith Barney in another CD. Unknown to John, both of these firms happened to invest in the same S&L. So when it closed down, John’s info gets conglomerated - and RTC only pays out 100K total.

But both ML and SB have told John his money is good. So someone’s gotta make up that 100K. And it’s whichever brokerage house gets their detailed info to RTC first. If that’s Merrill Lynch, then Smith Barney has to dig under their sofa cushions to make good on their “FSLIC Insured” promise.

If John ALSO happens to have 100K of his own money invested in that same S&L, then Merrill Lynch also has to go for the couch cushions.

There are more nuances to the 100K (now 250K, I think) insurance limit, including joint accounts and retirement accounts, that can effectively increase that limit, but this was 30+ years ago and I’ve forgotten most of it.

We literally had brokerage representatives lined up at the door on the day the institution closed, with tapes of investor information - because it was first-come, first-served in terms of access to that 100K of insurance. Since the official date of closing was just a rumor until it actually happened, I believe they were their with tapes every Friday afternoon for several weeks.

Pai-gow is actually one of the games that dealers are more likely to play with you and teach you the rules as you go. Just go to a quieter table during non-peak hours. Probably avoid the $100+ hand section in the most serious Vegas casino, too. I still don’t understand it, but everyone I know who does learned this way.

  1. FDIC member banks vs not, often bank vs. broker, especially at certain rates. FDIC protects you up to $250,000, pooled with the value of any other DDAs at the same bank. If the rate is indeed identical, then get the insured one. Likely if all things are equal, the non-insured one is negotiated at a higher rate, but it doesn’t always work out that way, and a one from months ago will have a lower rate.

  2. I’m not sure of the exact question, the broker handles it. The date you click BUY might be before the date they actually get received by you.

    1. These probably depend on the options you checked when opening it, and if they allow a default, what that company sets it to. I except most go to cash.
  3. Not sure what website you’re using, though is this for a secondary? I assume that’s the purchase + cost/interest since initial purchase.

  4. Be certain a CD is what you want. Rates aren’t terribly high compared to some other options, but the insurance is there in many cases. A treasury instrument might also be something you look into for similar benefits but different advantages and disadvantages. Liquidity particularly. Note different ways they show earnings: some have a purchase price and a final yield based on rates. Others have a fixed maturity price and you buy at a discount.

Look into Treasury I-bonds
https://www.treasurydirect.gov/savings-bonds/i-bonds/