Brokered CDs: What Are They and How Do They Work? (2024)

FAQs

Brokered CDs: What Are They and How Do They Work? ›

A brokered CD is similar to a traditional CD but can offer higher rates, longer terms and more liquidity. You can purchase this type of CD through a broker and potentially resell it on the secondary market before the maturity date.

Potential risks with brokered CDs

Market risk: The most common risk is that you'll need your funds before the CD matures. Although there are no early redemption fees (like there are for bank-issued CDs), you may receive less than your original purchase price.

Can you lose money in a brokered CD? Market interest rates frequently fluctuate, which means that the market value of a CD fluctuates, too. If a CD is sold on the secondary market at a lower value than its face value, it will have lost money. But there are no losses if the CD is kept until maturity.

In rare cases, you could lose money or value if you've: Placed more than $250,000 in a CD or account combination at an insured institution that fails. Invested with an uninsured brokered CD account, or an unusual CD type. Opened a CD when rates are rising or inflation is rising.

Your money may not be protected: The money you invest in a brokered CD is protected only if it's provided by a bank insured by the Federal Deposit Insurance Corporation or a credit union insured by the National Credit Union Administration. If it's not, you could lose all your funds if the financial institution fails.

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Key Takeaways. Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision. Yield to worst is often the same as yield to call. Yield to worst must always be less than yield to maturity because it represents a return for a shortened investment period.

In the event of death or the adjudication of incompetence of the owner of a CD, early withdrawal of the entire CD will be generally permitted without penalty, subject to potential limitations imposed by the Issuer, including as described below. Partial withdrawal of the owner's interest in a CD will not be permitted.

Brokered CDs are issued by banks and sold in bulk to investment firms and brokerages where they become available to investors for purchase. By doing this, the broker brings a lot of money to the bank, which often results in higher APYs than you can get with a traditional CD.

Brokered CDs are issued by banks and sold to brokerages in bulk. Brokerages then turn around and sell those CDs to customers. Since brokerages purchase them in bulk, they can negotiate better interest rates on brokered CDs and offer higher rates than those on traditional CDs.

What happens to my CD if the stock market crashes? ›

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

You can generally sell brokered CDs at any time in a secondary market, subject to market conditions. However, if you sell a brokered CD in the secondary market, you may lose some of your original investment due to a change in the market price of the CD.

A brokered CD is similar to a traditional one but may provide you with a higher yield and more flexible loan term options. These CDs also offer more liquidity since you can resell them on the secondary market before their maturity date and avoid an early withdrawal penalty.

Once your CD matures, you'll get your original investment back plus the interest accrued. Unlike stocks or cryptocurrencies, which present a risk of loss, CDs are generally considered safe investment vehicles that do not lose money.

The secondary market for brokered CDs also makes it much easier to get money out early. There is no actual penalty for selling on the secondary market, but there is sometimes a small sales fee. If interest rates fall, you may even be able to make a profit when selling a brokered CD before it reaches maturity.

If you need your funds before the brokered CD matures, you will need to sell the CD on the secondary market. This could mean you receive less than face value for the CD, depending on market rates. You can't simply break the CD and pay a penalty like you could if you buy a traditional CD from a bank.

A callable CD gives the bank or brokerage firm that offers it the ability to “call” (or “redeem”) the CD earlier than its maturity date. The bank is more likely to take the CD back early if interest rates suddenly drop; in turn, the CD is less likely to be called if interest rates go up.

The cons of CDs

With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.