## Lose Money on a Secondary Market CD with a Positive YTM?

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Topic Author
krazykat
Posts: 2
Joined: Mon May 03, 2021 4:08 pm

### Lose Money on a Secondary Market CD with a Positive YTM?

I am exploring secondary market CD's. I've done a lot of research and built some spreadsheets but am still puzzled by 1) YTM and 2) value after taxes. In this case:

Settlement Date: 3/26/21
Maturity: 2/14/22
CD Rate: 1.7%, paid semi-annually
Price: \$101.176 (CD price premium plus Fidelity commission)
Qty: 4,000 (or 4-\$1,000 CD's)
Accrued Interest: \$7.64
Total Paid: \$4,054.68

YTM per Fidelity is 0.375%, YIELD function per Excel is 0.374%.

If I understand correctly, I will receive \$34 (\$4,000 x 1.7% / 2) on 8/14/21 and 2/14/22, plus the \$4,000 on 2/14/22. So I spent \$4,054.58 on 3/26/21 to have \$4,068 by 2/14/22, a difference of \$13.32.

QUESTION 1: Doesn't that mean my "real" yield to maturity is \$13.32/\$4,054.58 = 0.329%, not 0.374%? Why are the numbers different? (If I wanted to compare it to something that would yield 0.35% in the same time period, how would I know which is better? The YTM doesn't seem reliable.)

Continuing the example, I believe the taxable interest amount is \$60.36 (\$68 - \$7.64 accrued). (Ignore the fact that it's split over two tax years.) In the 24% tax bracket, that's \$14,49,

QUESTION 2: Doesn't that mean that I am LOSING money on this CD with a positive YTM? I invested \$4,054.68 but will only have \$4,053.51 (\$4,068.00-\$14.49) after taxes. Am I missing something? I could instead invest in a money market earning next to nothing and still come out ahead. (Maybe the price premium just doesn't justify the CD Rate in a higher tax bracket? In which case there is definitely more than YTM to consider when purchasing secondary CD's.)

It seems like rather than relying on the stated YTM, I would be better off building a spreadsheet and doing my own calculations. Is my reasoning sound or am I missing something?
trueblueky
Posts: 2080
Joined: Tue May 27, 2014 3:50 pm

### Re: Lose Money on a Secondary Market CD with a Positive YTM?

If you pay \$4,054.68 and get \$4,000 at the end, that \$54.68 should show as bond premium on the 1099-Int. You'll receive \$4068, so you have \$13.32 taxable interest. Being spread over two years complicates it a bit.

This may show on Schedule B as:
CD interest. \$68

https://www.irs.gov/pub/irs-pdf/i1099int.pdf has details.
retired@50
Posts: 5487
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

### Re: Lose Money on a Secondary Market CD with a Positive YTM?

Welcome to the forum.

If I were you, I'd start shopping for CDs at Ally bank.

Regards,
This is one person's opinion. Nothing more.
alpenglow
Posts: 1213
Joined: Tue May 31, 2011 12:02 pm

### Re: Lose Money on a Secondary Market CD with a Positive YTM?

retired@50 wrote: Mon May 03, 2021 8:25 pm Welcome to the forum.

If I were you, I'd start shopping for CDs at Ally bank.

Regards,
Secondary CDs were a great deal for a while. Now, not so much.
#Cruncher
Posts: 3183
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

### Re: Lose Money on a Secondary Market CD with a Positive YTM?

krazykat wrote: Mon May 03, 2021 4:24 pmQUESTION 1: Doesn't that mean my "real" yield to maturity is \$13.32/\$4,054.58 = 0.329%, not 0.374%?
No, the 0.374% is correct. Yield to Maturity (YTM) is annualized. Your investment does grow about 0.329%. But it does so in less than one year. Here is what your investment would look like if the time from settlement to maturity was exactly one year. Using Excel's XIRR function, we calculate a return of 0.330%, almost identical to your 0.329%. Columns D & E show the income and balance in a hypothetical savings account with the same 0.330% APY.

Code: Select all

``````Row      Col A      Col B  Col C   Col D     Col E
Cash Flow  Days  Income   Balance  Selected Formulas
----------  ----  ------  --------  -----------------
2  2/14/2021  (4,054.68)                4,054.68
3  8/14/2021      34.00    181    6.63  4,027.31  D3: =E2*((1+B\$5)^(C3/365)-1)
4  2/14/2022   4,034.00    184    6.69      0.00  E4: =E3-B4+D4
---   -----
5       XIRR      0.330%   365   13.32            B5: =XIRR(B2:B4,A2:A4)``````
Now here is what it looks like with the actual settlement date 325 days before maturity. XIRR now produces a return of 0.371%, close to the 0.374% produced by the YIELD function. [*]

Code: Select all

``````Row      Col A      Col B  Col C   Col D     Col E
Cash Flow  Days  Income   Balance  Selected Formulas
----------  ----  ------  --------  -----------------
2  3/26/2021  (4,054.68)                4,054.68
3  8/14/2021      34.00    141    5.80  4,026.48  D3: =E2*((1+B\$5)^(C3/365)-1)
4  2/14/2022   4,034.00    184    7.52      0.00  E4: =E3-B4+D4
---   -----
5       XIRR     0.371%    325   13.32            B5: =XIRR(B2:B4,A2:A4)``````
trueblueky wrote: Mon May 03, 2021 8:23 pmIf you pay \$4,054.68 and get \$4,000 at the end, that \$54.68 should show as bond premium on the 1099-Int.
To be picky, \$7.64 of the \$54.68 is accrued interest; only \$47.04 (4000 * 101.176% - 4000) is bond premium. But both of these can be deducted to determine net taxable income:

Code: Select all

`````` 68.00  2 interest payments
-7.64  accrued interest