Investors trade brokered CDs via bond-like markets. These products have all the same qualities as bonds, including a secondary market, a market-driven price, yield to worst (YTW), yield to maturity (YTM), and, in some cases, callability.
At WMSUS, we can provide you with access to this competitive brokered CD market and help you earn higher interest than with a regular high-yield bank CD.
How Brokered CDs Work
Brokered CDs have the following attributes:
- Coupon: The bank will pay this interest rate to you, the CD holder, at specified intervals called the “coupon frequency.”
- Coupon Frequency: This specifies how frequently the bank will make coupon payments. Usually, the bank will pay you monthly, quarterly, or semi-annually. For longer maturities, the bank may pay interest annually.
- Maturity: This is the date when the CD will mature, and you will receive back your principal. If you purchased the brokered CD at a price less than $100, you might earn a profit from the difference in the lower price paid and the regular principal repayment.
- Callable: If a brokered CD is callable, then the issuing bank will have the ability to terminate the CD prematurely. If this happens, you will receive the full principal payment plus any interest you earned up to the call date.
- Price: The current market price of the CD on the secondary market. This price depends on the demand for CDs by investors and the macroeconomic interest rate environment.
- Quantity, Minimum, and Maximum: Depending on your broker, you may find that you can purchase fractional CDs. If not, you may need to purchase a specific quantity defined by the minimum and maximum set by the issuer or broker.
- APY / Yield to Maturity (YTM): This rate represents the total rate of return you would earn if you held the CD to maturity.
- Yield to Worst (YTW): The YTW of a brokered CD shows the anticipated yield an investor would earn if the issuer chooses to call. This calculation incorporates the full principal repayment along with any interest accrued up to the call date.
When reading the name of a CD, you will usually encounter the following naming convention: [Issuing Bank Name] [Coupon (Interest Rate)] CD [Maturity Date] [Callable]
As an example, you might see a CD that looks like this:
JP Morgan Chase 4.5% CD 1/1/2024 Callable.
This name tells you crucial information about this CD:
- You know that the issuer is JP Morgan, the largest bank in the United States.
- The coupon or interest rate is 4.5%. JP Morgan may pay this coupon monthly, quarterly, or semi-annually.
- The maturity of this CD is January 1, 2024. At the time of maturation, you will receive the principal of the CD back.
- JP Morgan has the right to call this CD at its discretion.
You should also make sure to purchase CDs from reputable issuers covered by the FDIC.
How You Can Exit Your Brokered CD with the Secondary Market
With a regular bank CD, your money stays locked up until the maturity date. If you wish to liquidate your CD, you must pay an early termination fee to the bank you bought it from.
A brokered CD has no such restrictions. Instead, you may sell your brokered CD prior to the maturity date on the secondary market.
The secondary market acts as a source of liquidity for buyers and sellers of brokered CDs. Depending on the movement of interest rates, you may find that your CD has gained or lost value.
Consider the following two types of interest rate shock scenarios:
- Rising Rates: In rising interest rate environments, CDs tend to lose value since investors can purchase bonds and CDs, and even invest in high-yield savings accounts with a higher interest rate than the rate at which the CD was originally issued.
- Falling Rates: In falling interest rate environments, CDs may gain value since they may offer higher rates than newly-issued debt products available to investors. However, if the issuing bank can call the CD, they may choose to do so to refinance their debt.
Either of these two scenarios may change the price at which you can sell your brokered CD on the secondary market. In this way, this type of CD behaves similarly to bonds and other types of debt investment products.
How High Net Worth Individuals Can Protect Their Wealth with Brokered CDs