LOST OVER $400 on CDs in 2 Weeks!

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BlueSkySS
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LOST OVER $400 on CDs in 2 Weeks!

Post by BlueSkySS » Sat Nov 17, 2018 12:03 am

So I setup a Vanguard IRA and rolled over prior employer 401K funds to Vanguard.

I bought a couple 10 year FDIC insured CDs and have somehow lost hundreds of dollars. Can someone explain how this could happen??
I didn't think you could lose money on CDs.

Mitchell777
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by Mitchell777 » Sat Nov 17, 2018 7:38 am

As I recall Vanguard provides a daily value on the CD much like if it were a bond. So, if interest rates go up the value goes down and vice-versa. You would only lose if you sell and I believe it's not easy to sell the brokerage CD's or better stated it's costly. Ten years is pretty far to go out but it may well fit your needs.

StopIroningShirts
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by StopIroningShirts » Sat Nov 17, 2018 7:41 am

Most traditional bank CDs carry a 3 month interest penalty if you redeem them early. Your bank statement doesn't give you a liquidation value when you see it every month (principal value less penalty).

A brokered CD can be sold instead of cashed in with a penalty. The price you're seeing is what it could be sold for. That causes the stated value to move more like a bond.

If you hold it until maturity, you get 100% of your value plus the agreed interest rate.

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Alexa9
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by Alexa9 » Sat Nov 17, 2018 7:43 am

Don't worry, be happy. I believe you only lose money if you sell it for a loss or it defaults and you're over the FDIC limit.

rkhusky
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by rkhusky » Sat Nov 17, 2018 7:44 am

BlueSkySS wrote:
Sat Nov 17, 2018 12:03 am
So I setup a Vanguard IRA and rolled over prior employer 401K funds to Vanguard.

I bought a couple 10 year FDIC insured CDs and have somehow lost hundreds of dollars. Can someone explain how this could happen??
I didn't think you could lose money on CDs.
See the Brokered CDs section of https://www.bogleheads.org/wiki/Certificate_of_deposit

keepingitsimple
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by keepingitsimple » Sat Nov 17, 2018 8:07 am

BlueSkySS wrote:
Sat Nov 17, 2018 12:03 am
So I setup a Vanguard IRA and rolled over prior employer 401K funds to Vanguard.

I bought a couple 10 year FDIC insured CDs and have somehow lost hundreds of dollars. Can someone explain how this could happen??
I didn't think you could lose money on CDs.
You’ve not actually lost any money on your brokered CDs. The value you see listed for your CDs is the current market value. The current market value is indicative of the approximate price you could expect to receive if you successfully sold your CDs on the open-market. However, if you keep the CDs to maturity you will receive back the face value of your CDs (the amount paid for a new-issue, brokered CD).

Therefore, for investors intending to keep new-issue, brokered CDs until maturity, the fluctuating market value listed in their account is an irrelevant valuation.

TBillT
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by TBillT » Sat Nov 17, 2018 9:44 am

If interest rates trend down, you could also see the CD value *increase* over par. This is the nature of broker CDs, the value shifts with markert like a bond. Normally you are holding so it does not matter. It is harder to sell broker CD's because there is limited market of buyers, but I believe I have sold a few in my Fidelity rollover IRA. Also there is survivor option so par value at that time.

z3r0c00l
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by z3r0c00l » Sat Nov 17, 2018 10:11 am

10 years! Hope you got at least 4%, could pay off well if interest rates drop again.

pleeson
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by pleeson » Sat Nov 17, 2018 10:19 am

In my humble opinion, when one buys brokered CDs, you should plan on holding them until maturity.
If interest rates drop a lot (unlikely in current environment) you could sell at a profit.
If you want to "play" interest rate fluctuations, Treasuries are more liquid and have no sales fees through VG.

goaties
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by goaties » Sat Nov 17, 2018 12:34 pm

It is disconcerting to see these paper "losses". I have suggested to Fidelity that they should let us decide whether to use the cost basis or the speculative current market value of bonds/CDs when summing our investments into a net worth figure. My net worth is off by many thousands as a result. Annoying.

ladycat
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by ladycat » Sat Nov 17, 2018 12:48 pm

I had the same anxiety & education a couple months ago when I purchased CDs in my 401(k) through Schwab. It's the first time I had purchased brokered CDs. I called Schwab to ask why the value had decreased. As others have replied, they're showing the current value if you sold the CD. If you hold to maturity, there's no change in value of your principal.

khh
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by khh » Sat Nov 17, 2018 12:59 pm

My rolling treasury and CD ladders have been losing value as well. I couldn't be happier. :mrgreen:

AlphaLess
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by AlphaLess » Sat Nov 17, 2018 1:05 pm

BlueSkySS wrote:
Sat Nov 17, 2018 12:03 am
So I setup a Vanguard IRA and rolled over prior employer 401K funds to Vanguard.

I bought a couple 10 year FDIC insured CDs and have somehow lost hundreds of dollars. Can someone explain how this could happen??
I didn't think you could lose money on CDs.
What's the notional value of the CD?
"You can get more with a kind word and a gun than with just a kind word." George Washington

straws46
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by straws46 » Sat Nov 17, 2018 1:27 pm

AlphaLess wrote:
Sat Nov 17, 2018 1:05 pm
BlueSkySS wrote:
Sat Nov 17, 2018 12:03 am
So I setup a Vanguard IRA and rolled over prior employer 401K funds to Vanguard.

I bought a couple 10 year FDIC insured CDs and have somehow lost hundreds of dollars. Can someone explain how this could happen??
I didn't think you could lose money on CDs.
What's the notional value of the CD?
A cd doesn't have a "notional" value. That term is used in derivatives and swaps. It is an assumed amount to calculate a stream of payments. If you have a floating rate loan of $1 million, the loan amount is real. To convert that floating rate loan to a fixed rate liability you can enter into an interest rate swap with a "notional" value of $1 million. In the swap the $1 million doesn't change hands and is only used to calculate the payments to hedge the actual loan.

AlphaLess
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by AlphaLess » Sat Nov 17, 2018 2:03 pm

straws46 wrote:
Sat Nov 17, 2018 1:27 pm
AlphaLess wrote:
Sat Nov 17, 2018 1:05 pm
BlueSkySS wrote:
Sat Nov 17, 2018 12:03 am
So I setup a Vanguard IRA and rolled over prior employer 401K funds to Vanguard.

I bought a couple 10 year FDIC insured CDs and have somehow lost hundreds of dollars. Can someone explain how this could happen??
I didn't think you could lose money on CDs.
What's the notional value of the CD?
A cd doesn't have a "notional" value. That term is used in derivatives and swaps. It is an assumed amount to calculate a stream of payments. If you have a floating rate loan of $1 million, the loan amount is real. To convert that floating rate loan to a fixed rate liability you can enter into an interest rate swap with a "notional" value of $1 million. In the swap the $1 million doesn't change hands and is only used to calculate the payments to hedge the actual loan.
A mere technicality.

What is the dollar amount of CD purchased?

If $250K, then $400K loss is nothing.

A 10-year CD, priced just like a 10-year bond, will have price fluctuations when priced (marked) to market.
"You can get more with a kind word and a gun than with just a kind word." George Washington

Nate79
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by Nate79 » Sat Nov 17, 2018 2:04 pm

Check back in 10 years and let us know if you lost money.

10 year CD? Unbelievable.

mhalley
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by mhalley » Sat Nov 17, 2018 2:06 pm

10 year CDs don’t seem to be a very good buy right now. Can you explain your thinking on why you went so long?

cadreamer2015
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by cadreamer2015 » Sat Nov 17, 2018 2:09 pm

My net worth is off by many thousands as a result. Annoying.
Why is the market value of your investments not the correct value to include in your net worth calculation? A bond fund you might own will show a NAV based on the market value of the bonds, not the face amount. If you own a bond fund, I imagine you use the NAV rather than your share of the face amount of bonds owned by the fund.
De gustibus non est disputandum

ivk5
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by ivk5 » Sat Nov 17, 2018 2:14 pm

mhalley wrote:
Sat Nov 17, 2018 2:06 pm
10 year CDs don’t seem to be a very good buy right now. Can you explain your thinking on why you went so long?
Just a guess: because of (trivially) higher yield, without regard for / understanding of term risk.

OP seems to have jumped into brokered CDs without much understanding of them or of the flat yield curve environment we’re in.

“More money has been lost reaching for yield than at the point of a gun."

Alan S.
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by Alan S. » Sat Nov 17, 2018 2:43 pm

Since brokered CDs act much like bonds, a newer 10 year CD current market value will suffer more than a much shorter term CD with each interest rate increase just as a long term bond market value will suffer more than a ST bond. As others have stated, you would ordinarily plan to hold these to maturity and could ignore the current market value losses showing on brokerage statements.

In fact, for those subject to RMDs, the year end value of IRA CDs will determine the following year's RMD. The IRA custodian will use the market value of CDs in a brokerage IRA to determine the year end value of that brokerage account for reporting to the IRS, therefore the RMD will be reduced incrementally in the early years. The market value losses reduce as the brokered CD nears maturity assuming no additional interest rate changes since face value will be paid at maturity.

goaties
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by goaties » Sun Nov 18, 2018 4:11 pm

cadreamer2015 wrote:
Sat Nov 17, 2018 2:09 pm
My net worth is off by many thousands as a result. Annoying.
Why is the market value of your investments not the correct value to include in your net worth calculation? A bond fund you might own will show a NAV based on the market value of the bonds, not the face amount. If you own a bond fund, I imagine you use the NAV rather than your share of the face amount of bonds owned by the fund.
Because I know I will not be selling the CDs on the secondary market. I will never realize their paper losses. Unfortunately, with a bond fund, I have no choice over when/if the component bonds will be sold on the secondary market. That's the main reason I really hate bond funds...even though I do own some. I am more risk averse than you can possibly imagine...hence my understanding of how the OP feels.

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dm200
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by dm200 » Sun Nov 18, 2018 4:24 pm

When held to maturity OR paid by FDIC if the bank fails, you will get the full face value of the brokered CD.

You only take a loss if you sell the brokered CD on the secondary market before maturity. In fact, you will actually get 1-2% less than the "value" you see because of the bid-ask spread.

sport
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by sport » Sun Nov 18, 2018 4:26 pm

AlphaLess wrote:
Sat Nov 17, 2018 2:03 pm
If $250K, then $400K loss is nothing.
:?: :shock:

Call_Me_Op
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by Call_Me_Op » Mon Nov 19, 2018 8:16 am

You should understand what you are buying before you buy it. Brokered CDs are essentially bonds, and their value will fluctuate prior to maturity. Any loss is a paper loss unless you sell.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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munemaker
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Re: LOST OVER $400 on CDs in 2 Weeks!

Post by munemaker » Mon Nov 19, 2018 9:13 am

Brokered CDs are marked to market, meaning the value changes along with interest rates. If you hold the CDs to maturity, you will receive your entire principle back.

CDs purchased directly from a bank are not marked to market. The value on the monthly statement is the value on the previous statement plus any interest earned. The stated value never goes down. There is no secondary market, but you can take an early withdrawal by paying whatever penalty was agreed to when the CD was opened.

Look at it this way. If you bought a CD that paid 4%, and the interest rates on new CDs went up to 5%, who is going to buy your CD at face value? No one, because they can buy a new one paying 5%. So if you want to sell your CD under these circumstances, you have to discount it. That's why the stated value is lower.

You really have not lost anything. If you hold the CD to maturity, you will receive all the interest at the rate agreed to when you opened the CD, plus the return of your principle.

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