Step callable long term CD for fixed income- pros & cons?

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jane1
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Step callable long term CD for fixed income- pros & cons?

Post by jane1 »

I got this offering in an email from broker firm. Has anyone used something similar to these for the fixed income part of their portfolio? I understand the interest rate (& inflation) risk and the fact it is callable but for me 3%-8% is reasonable for part of my portfolio. What are the other pros/cons of this? Any catches?

Offering details (from TD Ameritrade):

Issuer: Wells Fargo & Company (SD)
Rating: FDIC Insured*
Order Period: Now through April 08, 2015 (expected)
Coupons: Steps: 3.00% till 04/13/2024, 4.00% till 04/13/2032, 6.00% till 04/13/2033, 8.00% till 04/13/2035
Maturity: April 13, 2035 (20 years)
Payment Frequency: Semi-Annual - First Pay 10/13/2015
Call Status: Callable April 13th, 2018 (quarterly thereafter)
Survivor's Option: Yes - up to applicable limits
Price: $100.00
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cheese_breath
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Re: Step callable long term CD for fixed income- pros & cons

Post by cheese_breath »

Personally I wouldn't want to be locked in to 3% for 9 years and 4% for another 8 years. Are you allowed to get out early? If so, what is the penalty?
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Topic Author
jane1
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Re: Step callable long term CD for fixed income- pros & cons

Post by jane1 »

cheese_breath wrote:Personally I wouldn't want to be locked in to 3% for 9 years and 4% for another 8 years. Are you allowed to get out early? If so, what is the penalty?
i had assumed it would be something like a 3-month penalty but reading the fine print now. Says it will be sold on a secondary market if redeemed prior to maturity and may return less than the original investment.
That makes it more like bonds.

Not for me. Thanks for pointing it out.
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Wricha
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3% CD FDIC - Wells Fargo

Post by Wricha »

[Thread moved into here, see below. --admin LadyGeek]
    What do you folks think of this offer?

    TD Ameritrade is participating in the FDIC Insured* Wells Fargo & Company (SD) Callable Step-up CD offering.

    Offering details:

    Issuer:
    Wells Fargo & Company (SD)
    Rating:
    FDIC Insured*
    Order Period:
    Now through April 08, 2015 (expected)
    Coupons:
    Steps: 3.00% till 04/13/2024, 4.00% till 04/13/2032, 6.00% till 04/13/2033, 8.00% till 04/13/2035
    Maturity:
    April 13, 2035 (20 years)
    Payment Frequency:
    Semi-Annual - First Pay 10/13/2015
    Call Status:

    Callable April 13th, 2018 (quarterly thereafter)
    Survivor's Option:
    Yes - up to applicable limits
    Price:
    $100.00
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    jhfenton
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    Re: 3% CD FDIC - Wells Fargo

    Post by jhfenton »

    Interesting. I see it on the New Issues: CDs list too. It's too late for me to think about it tonight. But I look forward to thinking about it in the morning. :happy
    sawhorse
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    Re: 3% CD FDIC - Wells Fargo

    Post by sawhorse »

    Where is the product page?

    I suppose that if you want to buy a callable CD, now is the best time to do it. It would be hard for interest rates to decline even more to the point that the bank would make a call. What is the early surrender fee?
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    Flobes
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    Re: 3% CD FDIC - Wells Fargo

    Post by Flobes »

    Duplicate thread; someone posted this earlier:
    viewtopic.php?f=10&t=161619
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    Rob5TCP
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    Re: 3% CD FDIC - Wells Fargo

    Post by Rob5TCP »

    if rates rise it won't be called and you will have it for quite awhile. If rates
    should go lower or stay the same, they will probably call it. You lose if rates
    should sink (they call it) and you lose if rates go through the roof (you are
    stuck with it).

    Only the last few years are really impressive. If rates go sky high you are stuck
    for twenty years. There are offers on/off of 5-7 years that are 3% I would rather
    wait for that then get 10 years at 3% and then 8 years at 4% (last three years are
    almost irrelevant).
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    jhfenton
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    Re: 3% CD FDIC - Wells Fargo

    Post by jhfenton »

    Rob5TCP wrote:if rates rise it won't be called and you will have it for quite awhile. If rates
    should go lower or stay the same, they will probably call it. You lose if rates
    should sink (they call it) and you lose if rates go through the roof (you are
    stuck with it).

    Only the last few years are really impressive. If rates go sky high you are stuck
    for twenty years. There are offers on/off of 5-7 years that are 3% I would rather
    wait for that then get 10 years at 3% and then 8 years at 4% (last three years are
    almost irrelevant).
    Yeah. This is what I was thinking while I was brushing my teeth. If rates rise, you're stuck selling a brokered CD at a discount (a hard to calculate discount with all the step-ups and call feature, but some sort of a discount). If rates fall, stay flat, or rise more slowly than the step-up, they will call at par and you lose any potential appreciation in the value.

    So I'm not sure how it makes any sense.
    Sportswhiz00
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    Re: 3% CD FDIC - Wells Fargo

    Post by Sportswhiz00 »

    Out of curiosity, does anybody here have experience with whether callable cds are in fact called?
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    Wricha
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    Re: 3% CD FDIC - Wells Fargo

    Post by Wricha »

    jhfenton wrote:
    Rob5TCP wrote:if rates rise it won't be called and you will have it for quite awhile. If rates
    should go lower or stay the same, they will probably call it. You lose if rates
    should sink (they call it) and you lose if rates go through the roof (you are
    stuck with it).

    Only the last few years are really impressive. If rates go sky high you are stuck
    for twenty years. There are offers on/off of 5-7 years that are 3% I would rather
    wait for that then get 10 years at 3% and then 8 years at 4% (last three years are
    almost irrelevant).
    Yeah. This is what I was thinking while I was brushing my teeth. If rates rise, you're stuck selling a brokered CD at a discount (a hard to calculate discount with all the step-ups and call feature, but some sort of a discount). If rates fall, stay flat, or rise more slowly than the step-up, they will call at par and you lose any potential appreciation in the value.

    So I'm not sure how it makes any sense.
    I understand the call features. Getting 3% guaranteed starting out is not so bad. Not wedded to them just thought the terms would be of interest.
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    LadyGeek
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    Re: Step callable long term CD for fixed income- pros & cons

    Post by LadyGeek »

    FYI - I moved Wricha's thread into here, which is in the Investing - Theory, News & General forum (general investing).
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    in_reality
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    Re: 3% CD FDIC - Wells Fargo

    Post by in_reality »

    Sportswhiz00 wrote:Out of curiosity, does anybody here have experience with whether callable cds are in fact called?
    I had 4 CDs from Gateway Bank Florida called in about the past year. They were in the 3.25-3.55% range with 12-15 years remaining.

    Some 3% -3.3% 12-14 year (remaining) CDs by other banks haven't been called.

    I have a 4% Wells Fargo CD (18 years remaining) up for call starting in Sept. and think it's a gonner.

    Who knows though...
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    market timer
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    Re: Step callable long term CD for fixed income- pros & cons

    Post by market timer »

    I would not recommend buying this product. Because this is a callable CD, you have to keep in mind that you only receive the rates advertised if they are below-market at the time the CD is callable. The first call date is April 2018. So, really, what you are buying is a 3-year CD that pays 3%. That's a good rate for a 3-year CD, roughly double what you can earn on a normal 3-year CD. Think of this as collecting an option premium worth 4.5% (earning an above-market return for 3 years times the difference, 3% - 1.5%). What you are giving up is optionality for the remaining time to maturity, or 17 years. For those 17 years, every time your CD is not called, it means you could get a better deal on the secondary market, buying bonds and selling calls yourself.

    Compare this product to an EE savings bond. In the first 17 years of holding this CD, your annualized return would be 3.47%. Whereas, with an EE bond, your annualized return is 3.53% if you hold for 20 years. If rates decline (or simply fail to rise as much as the market currently expects), your CD will be called early, and you would have to reinvest at a lower rate. Whereas, with the EE bond, you have locked in 3.53%. If rates rise faster than expected, you will be stuck with your 3.47% return. Whereas, with the EE bond, you can redeem the security with no loss of principal, and reinvest in higher yielding securities on the secondary market. In other words, by buying this callable CD, you are giving away optionality, and with the EE bond, you are receiving optionality. Since these two investments have comparable long term returns ignoring optionality, it seems a no-brainer to prefer the EE bond.

    If I wanted to allocate a larger percentage of my portfolio to this investment than I could fit into EE bond purchases, I'd be inclined to buy long term Treasuries and write call options against them--getting a fair deal with transparent pricing and having reasonable liquidity--rather than buy a structured CD.
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    Wricha
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    Re: Step callable long term CD for fixed income- pros & cons

    Post by Wricha »

    market timer wrote:I would not recommend buying this product. Because this is a callable CD, you have to keep in mind that you only receive the rates advertised if they are below-market at the time the CD is callable. The first call date is April 2018. So, really, what you are buying is a 3-year CD that pays 3%. That's a good rate for a 3-year CD, roughly double what you can earn on a normal 3-year CD. Think of this as collecting an option premium worth 4.5% (earning an above-market return for 3 years times the difference, 3% - 1.5%). What you are giving up is optionality for the remaining time to maturity, or 17 years. For those 17 years, every time your CD is not called, it means you could get a better deal on the secondary market, buying bonds and selling calls yourself.

    Compare this product to an EE savings bond. In the first 17 years of holding this CD, your annualized return would be 3.47%. Whereas, with an EE bond, your annualized return is 3.53% if you hold for 20 years. If rates decline (or simply fail to rise as much as the market currently expects), your CD will be called early, and you would have to reinvest at a lower rate. Whereas, with the EE bond, you have locked in 3.53%. If rates rise faster than expected, you will be stuck with your 3.47% return. Whereas, with the EE bond, you can redeem the security with no loss of principal, and reinvest in higher yielding securities on the secondary market. In other words, by buying this callable CD, you are giving away optionality, and with the EE bond, you are receiving optionality. Since these two investments have comparable long term returns ignoring optionality, it seems a no-brainer to prefer the EE bond.

    If I wanted to allocate a larger percentage of my portfolio to this investment than I could fit into EE bond purchases, I'd be inclined to buy long term Treasuries and write call options against them--getting a fair deal with transparent pricing and having reasonable liquidity--rather than buy a structured CD.
    Market Timer,
    You are correct I was just thinking that getting interest payments semi annual might be attractive
    acegolfer
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    Re: Step callable long term CD for fixed income- pros & cons

    Post by acegolfer »

    I think one of the 3 will happen in 20 years.

    1. You can't wait 20 years and redeem at under fair value. (bad for you)
    2. Market rate goes down and the bank will call CD (bad for you)
    3. If neither, you forget the existence of this CD in 2035 (bad for you)
    Dandy
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    Re: Step callable long term CD for fixed income- pros & cons

    Post by Dandy »

    I think CDs are a good diversifier for retiree fixed income. I think a small allocation to longer term CDs is ok but I'm thinking max 10 years. I could see locking in a 20 year CD with those rates as a hedge against low interest rates and even deflation. But, only for a small part of my fixed income. If these are brokerage CDs then the interest will be paid out probably semi annually? If so, you can reinvest those dividends in bond funds as interest rates rise - if they don't rise the CD will look good.

    My old EE bonds now paying 4% look pretty good but didn't for many years.
    Dandy
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    Re: Step callable long term CD for fixed income- pros & cons

    Post by Dandy »

    Oops - didn't pick up on the callable feature - not worth it when that is included.
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