Can someone help me to comprehend secondary market CDs?

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corp_sharecropper
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Can someone help me to comprehend secondary market CDs?

Post by corp_sharecropper » Mon Apr 20, 2020 3:04 pm

I've googled, I've tried to understand on Fidelity's website through help pages and glossaries, yet I can't seem to comprehend secondary market CDs. I think much of my confusion comes from different sources using different terminology, but I'm not sure.

I want to understand them in the sense that I want to be able to mentally convert them into newly issued CD's, as those make sense to me & I understand them, so that I can then compare secondary to new CD's.

Below is a screenshot from Fidelity's secondary CD search results:
Image

I can see that "Coupon" is referring to the same rate in the CD description column. Is it correct to understand the "Coupon" column to simply mean the rate the CD was initially issued at?

Next is coupon frequency, I presume there's no difference in end result for the owner of a CD, in terms of coupon frequency, whether the CD is new secondary?

Next column is maturity date, unless there is something truly crazy about secondary CD's, I'm assuming this terminology means exactly what it means for new CD's.

Next, we have call date, I'll skip this as I would be unlikely to purchase a callable CD (please let me know if I'm being foolish by not considering callable CD's).

Now here's where I get lost...

The yield subheading under bid, what is this referring to and how does it play into a calculation of what one should expect from a secondary CD? Does one actually place a "bid" specifying this yield number when buying a secondary CD? The numbers look enormous, I have no idea what this means and how it pertains to a hypothetical "bid".

Price Qty (min) subheading under bid... Is the first number more like a percentage? I ask b/c almost every CD I've ever purchased, all new, has been in $1000 units. Who's "bid" price qty(min) am I even looking at here? Is the Qty the amount available or the largest amount someone has bid to purchase or something?

Price Qty(min) under Ask heading, so when someone wants to sell a CD they specify all this? Given there is a spread between bid/ask, how is this resolved to come to a deal? It just seems to me that there would be far far far less liquidity/activity for secondry CD's to work like an ETF or something like that. Is the "Qty" under the ask heading truly the max one can purchase (i mean that sounds like it would be the case but I'm terribly confused by all this so I feel I have to ask)?

What does "Yield to Worst" (under Ask)even mean? Worst what? Is this the yield one would receive if they purchased a secondary CD? What is the relationship of these "Ask" yields to that of the "Yield" that is under the bid heading? They sure are very far apart, can't imagine they are referring to the same thing.

Yield to maturity, under Ask, I notice this seems to be the same as yield to worst in all the secondary CD's I've seen... So what's the difference?

As you can see, I'm terribly confused by who is setting these bid/ask values, whether I would have to specify these values if I wanted to buy a secondary CD, and how one can determine what they're buying into.

Depth of book, I presume this shows you any current bids... Is that right? Seems only to be available for CD's with bids.

As if it couldn't get anymore confusing, we now have a column called "3rd Party Price"... Price for whom? Who is a 3rd party? Is it me if I were to purchase one? If so, does that mean there is a set price and all that bid/ask data is superfluous? If not, what is the point of having yet another, a third in fact, price value listed in this table (after bid & ask)?




I don't want this to be derailed into the merits of secondary vs new CD's, I just want to be able to make sense of secondary CD's, how to interpret the data in this table, and how to compare them to new CD's in the sense that with a new CD, I basically just look at it and think "oh ok, I can buy $10K worth of this 1-year CD and in 1 year I'll get my $10K back + $XX.XX b/c the rate is X.XX%". I also already understand the risks/considerations of paying a premium as it pertains to FDIC, not interested in a debate or anything over that, but I'm not sure I understand what the heck price one would pay for secondary CD to begin with due to the confusion previously mentioned so I'm not even to the point where I need to consider this risk. Finally, it would seem to me, that if I could (easily, I hope) mentally convert all this secondary CD info into a virtual and equivalent new CD, I'd better understand them and would be able to easily compare secondary/new.

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Kevin M
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Re: Can someone help me to comprehend secondary market CDs?

Post by Kevin M » Mon Apr 20, 2020 3:41 pm

I will try to answer in more detail later, but now only have time for a quick reply.

If you are buying a secondary CD, all that matters is what you see in the Ask columns. The Bid columns are relevant to selling a CD.

However, something that's very important, and that I don't think you asked about, is that the Ask yields (or bid yields for that matter) don't factor in the $1 per CD ($1,000 face value) commission that you'll pay at Fidelity. For CDs with terms as short as you're looking at, this will have a huge impact on your net yield.

Think about it. A dollar per $1K face value is about 0.1%, so for a 1-year CD that knocks off about 0.1% of the yield. For a term shorter than one year, it reduces the net yield even further.

If you click through the buy screens, which is fine as long as you don't submit the order, Fidelity will display your net yield after factoring in the commission. The other way to do it is to add the 0.1 to the price, and use the spreadsheet YIELD function to calculate the net yield. I can provide more details on this if you want.

Brokered CDs aren't a very good deal these days, so I haven't paid much attention to them, but I've done lots of analysis on them in the past, and often got slightly better deals in the secondary market, but not for very short-term CDs for which the commission eats too much into the net yield.

Kevin
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welderwannabe
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Re: Can someone help me to comprehend secondary market CDs?

Post by welderwannabe » Mon Apr 20, 2020 3:55 pm

Also note that FDIC insurance does not cover the premium that you are paying due to the high coupon. All of those CDs are being sold above par. If the bank fails you could take a haircut.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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alpenglow
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Re: Can someone help me to comprehend secondary market CDs?

Post by alpenglow » Mon Apr 20, 2020 4:15 pm

I simply filter for non-callable CDs and look at the yield to worst. I avoid premium CDs (priced over 100) for the reason welderwannabe mentioned. I locked in some 3 year, 3% CDs a year ago and haven't looked at rates recently. You're likely to do better going direct to banks/credit unions right now as Kevin M alluded to.

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Kevin M
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Re: Can someone help me to comprehend secondary market CDs?

Post by Kevin M » Mon Apr 20, 2020 7:02 pm

OK, getting back to this, as I said, the most important question you didn't ask is, "What is my net yield after paying the $1 per CD commission?" I did the calculation on a couple of these approximately 1-month CDs, and the answer is that the yield is negative after including the commission. For one I checked, the yield went from about 0.5% to -0.5%.

If you know how to use a spreadsheet, I can show you how to use the YIELD function to verify what I'm saying. Or, wait until tomorrow when the market is open, and click through the buy screens to the preview, and Fidelity will show you your net yield (after commission).

So the bottom line is that you would not want to buy a CD with such a short term on the secondary market. I can't think of a reason that anyone would. Stick to new-issue CDs for shorter terms. As I recall, I had to go out to at least 2-year maturities to find better deals on the secondary market, and often the best deals were for very small quantities, so hardly worth it unless you are only investing a few thousand dollars.

You asked a lot of questions, so let me try to focus on the ones that are most relevant to your stated objective:
corp_sharecropper wrote:
Mon Apr 20, 2020 3:04 pm
I want to understand them in the sense that I want to be able to mentally convert them into newly issued CD's, as those make sense to me & I understand them, so that I can then compare secondary to new CD's.
Unless you can do the equivalent of the YIELD function calculation "mentally", you cannot mentally compare them to new-issue CDs, since the search results screen at Fidelity does not show you the net yield (after commission). So the first thing you must do is use one of the methods I've described to determine the net yield.

I already mentioned that you can ignore all the Bid info if you're just interested in buying a CD, so I'll skip the bid questions.
Price Qty(min) under Ask heading, so when someone wants to sell a CD they specify all this? Given there is a spread between bid/ask, how is this resolved to come to a deal? It just seems to me that there would be far far far less liquidity/activity for secondry CD's to work like an ETF or something like that. Is the "Qty" under the ask heading truly the max one can purchase (i mean that sounds like it would be the case but I'm terribly confused by all this so I feel I have to ask)?
You don't need the answers to all of these questions to compare buying secondary CDs to buying new-issue CDs. But briefly, there is a market maker that takes a cut in the form of the bid/ask spread, which is true for pretty much all marketable securities.

Yes, the Ask Qty is the number of CDs being offered, and the number in parentheses is the minimum being offered. So in the first row of your table, 8 are being offered and the minimum quantity is 8. So buying $8K face value is your only choice for this one.

The Ask Price is what you would start with if you want to calculate your net yield (after commission). So the price for the first one is 100.045 ($1000.45 for one CD), but you would pay 100.145 ($1001.45 for one CD), and it is the latter number you would plug into your YIELD function for price.

If you click through the buy screens to the preview, Fidelity will show you your net yield and the total amount you'll pay including commission, so if you do it this way, you can ignore the price and yield you see in the search results screen, other than maybe looking for the highest gross yields (before commission) to further investigate.
What does "Yield to Worst" (under Ask)even mean? Worst what? Is this the yield one would receive if they purchased a secondary CD? What is the relationship of these "Ask" yields to that of the "Yield" that is under the bid heading? They sure are very far apart, can't imagine they are referring to the same thing.

Yield to maturity, under Ask, I notice this seems to be the same as yield to worst in all the secondary CD's I've seen... So what's the difference?
Yield to worst is only relevant if the CD is callable, in which case it's the yield you'd get if the CD were called at the first call date. YTM and YTW are the same for all the CDs you've seen because you haven't looked at any callable CDs, or if you have, the price is less than 100. YTW will be less than YTM for a callable CD selling at a premium (more than 100). You can easily verify this by clicking "Show more criteria" in your search criteria screen, then setting Call Protection to No, and expanding your maturity range to see enough CDs that you'll see some callable ones.

The reason the ask and bid yields are so far apart is that at the very short maturities you're looking at, a very small difference in price makes a very big difference in yield. This is why a price increase of only 0.1 causes a positive yield to go negative.

If you look at longer maturities, you'll see smaller bid/ask spreads (where you can even find a bid), but the bid/ask spreads for CDs generally are quite large, compared to say Treasuries, with the former easily being 1% or more (in terms of price), and the latter usually measured in a few basis points.
As you can see, I'm terribly confused by who is setting these bid/ask values, whether I would have to specify these values if I wanted to buy a secondary CD, and how one can determine what they're buying into.
Market's not open now, but as I recall, when you click Buy, the first buy screen will prefill the ask price into the limit price field. As long as someone hasn't beaten you to it before you submit the order, your order will be filled at that price plus the 0.1 commission.
Depth of book, I presume this shows you any current bids... Is that right? Seems only to be available for CD's with bids.
Depth of book will appear if there are more than one ask offer or more than one bid offer. The search results summary screen shows you the highest ask yield, but you may want a smaller or larger quantity than that offer provides, and another ask offer might provide that, but at a lower yield. Expand your search results and you will find depth of book where there is only an ask displayed in the search results screen.
As if it couldn't get anymore confusing, we now have a column called "3rd Party Price"... Price for whom? Who is a 3rd party? Is it me if I were to purchase one? If so, does that mean there is a set price and all that bid/ask data is superfluous? If not, what is the point of having yet another, a third in fact, price value listed in this table (after bid & ask)?
I've never paid any attention to this, and I've purchased many secondary CDs. I guess it's there to give you an idea of how "fair" the price being offered by Fidelity is, but unless you also have a brokerage account at at least one other broker that you can use to compare, it's not actionable.

Hope this helps. Glad to further clarify, or answer other questions you have relative to buying secondary CDs.

Kevin
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Ambitious994
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Re: Can someone help me to comprehend secondary market CDs?

Post by Ambitious994 » Mon Apr 20, 2020 9:34 pm

corp_sharecropper wrote:
Mon Apr 20, 2020 3:04 pm
I've googled, I've tried to understand on Fidelity's website through help pages and glossaries, yet I can't seem to comprehend secondary market CDs. I think much of my confusion comes from different sources using different terminology, but I'm not sure.

I want to understand them in the sense that I want to be able to mentally convert them into newly issued CD's, as those make sense to me & I understand them, so that I can then compare secondary to new CD's.

Below is a screenshot from Fidelity's secondary CD search results:
Image

I can see that "Coupon" is referring to the same rate in the CD description column. Is it correct to understand the "Coupon" column to simply mean the rate the CD was initially issued at?

Next is coupon frequency, I presume there's no difference in end result for the owner of a CD, in terms of coupon frequency, whether the CD is new secondary?

Next column is maturity date, unless there is something truly crazy about secondary CD's, I'm assuming this terminology means exactly what it means for new CD's.

Next, we have call date, I'll skip this as I would be unlikely to purchase a callable CD (please let me know if I'm being foolish by not considering callable CD's).

Now here's where I get lost...

The yield subheading under bid, what is this referring to and how does it play into a calculation of what one should expect from a secondary CD? Does one actually place a "bid" specifying this yield number when buying a secondary CD? The numbers look enormous, I have no idea what this means and how it pertains to a hypothetical "bid".

Price Qty (min) subheading under bid... Is the first number more like a percentage? I ask b/c almost every CD I've ever purchased, all new, has been in $1000 units. Who's "bid" price qty(min) am I even looking at here? Is the Qty the amount available or the largest amount someone has bid to purchase or something?

Price Qty(min) under Ask heading, so when someone wants to sell a CD they specify all this? Given there is a spread between bid/ask, how is this resolved to come to a deal? It just seems to me that there would be far far far less liquidity/activity for secondry CD's to work like an ETF or something like that. Is the "Qty" under the ask heading truly the max one can purchase (i mean that sounds like it would be the case but I'm terribly confused by all this so I feel I have to ask)?

What does "Yield to Worst" (under Ask)even mean? Worst what? Is this the yield one would receive if they purchased a secondary CD? What is the relationship of these "Ask" yields to that of the "Yield" that is under the bid heading? They sure are very far apart, can't imagine they are referring to the same thing.

Yield to maturity, under Ask, I notice this seems to be the same as yield to worst in all the secondary CD's I've seen... So what's the difference?

As you can see, I'm terribly confused by who is setting these bid/ask values, whether I would have to specify these values if I wanted to buy a secondary CD, and how one can determine what they're buying into.

Depth of book, I presume this shows you any current bids... Is that right? Seems only to be available for CD's with bids.

As if it couldn't get anymore confusing, we now have a column called "3rd Party Price"... Price for whom? Who is a 3rd party? Is it me if I were to purchase one? If so, does that mean there is a set price and all that bid/ask data is superfluous? If not, what is the point of having yet another, a third in fact, price value listed in this table (after bid & ask)?




I don't want this to be derailed into the merits of secondary vs new CD's, I just want to be able to make sense of secondary CD's, how to interpret the data in this table, and how to compare them to new CD's in the sense that with a new CD, I basically just look at it and think "oh ok, I can buy $10K worth of this 1-year CD and in 1 year I'll get my $10K back + $XX.XX b/c the rate is X.XX%". I also already understand the risks/considerations of paying a premium as it pertains to FDIC, not interested in a debate or anything over that, but I'm not sure I understand what the heck price one would pay for secondary CD to begin with due to the confusion previously mentioned so I'm not even to the point where I need to consider this risk. Finally, it would seem to me, that if I could (easily, I hope) mentally convert all this secondary CD info into a virtual and equivalent new CD, I'd better understand them and would be able to easily compare secondary/new.
So I know my post technically does not answer your questions, but you really do not need to buy Brokered CDs. You can look at FDIC Insured CDs from Financial Institutions that are mainly online and they will provide you great rates that are much better than the big Tier I Banks. Brokered CDs are a completely different animal and have a variety of risks, issues, and other problems with them and make them not worth the headache.

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Kevin M
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Re: Can someone help me to comprehend secondary market CDs?

Post by Kevin M » Tue Apr 21, 2020 1:13 pm

Kevin M wrote:
Mon Apr 20, 2020 7:02 pm
OK, getting back to this, as I said, the most important question you didn't ask is, "What is my net yield after paying the $1 per CD commission?" I did the calculation on a couple of these approximately 1-month CDs, and the answer is that the yield is negative after including the commission. For one I checked, the yield went from about 0.5% to -0.5%.

If you know how to use a spreadsheet, I can show you how to use the YIELD function to verify what I'm saying. Or, wait until tomorrow when the market is open, and click through the buy screens to the preview, and Fidelity will show you your net yield (after commission).
Now that the market is open, we can click through the buy screens to see what happens with a very short-term CD. Looking at CDs with about a month to two months to maturity, here are the first few in the search results, sorted by descending ask yield (I want the highest yield, right?):

Image

I'll skip the first one, since it's got less than one month to maturity, but I'll click Buy on the second one, maturing 5/28/2020, with a gross ask yield of 0.600% and a gross ask price of 100.176. After selecting an account, here's what I see:

Image

Note that the limit price has been prefilled with the ask price we saw on the search results screen (as I had recalled was the case).

The min qty is 1, so I'll just enter 1 for Quantity, then click Preview Order. This is what I see:

Image

This verifies what I posted earlier--that the net yield (after commission) would be negative. However, rather than showing me the negative yield, Fidelity won't even let me enter an order for a negative yield. So why do they even offer it???

Now let's look at maturities of about one year, so we can see the impact of the commission on the yield. Here are some of the search results, again sorted by descending ask yield.

Image

Note the small quantities available, supporting what I mentioned about highest yields often offered for small quantities. I'll click buy on the first one, offering 3 with minimum qty 1, at a price of 100.145 and ask yield of 1.000%, enter quantity 1, and go to the preview screen:

Image

Most importantly, note that after adding 0.1 to the price, the net yield is about 0.9%, so as mentioned in an earlier post, the 0.1% commission knocks about 0.1% off the yield for a 1-year CD (selling at close to par value of 100). For a 2-year CD it would knock about 0.05% off the yield, and so on, so the longer the maturity, the better chance you have of getting a higher yield than a new-issue CD.

Looking at the summary screen for new-issue CDs, I see 1-year at 0.90%, so about the same as the secondary CD deal, but there are only 3 available at this yield, and any gross yield lower than 1% will have a net yield lower than the new issue yield of 0.9%. If I want 10, for example, the best gross yield I find is 0.831% (Qty 13, min qty 1), and clicking through the buy screen to the preview, this results in a net yield of 0.71%, about as expected after commission, and not competitive with a new-issue at 0.9%.

Kevin
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