UPDATED: Questions already answered [Are my facts correct on CDs?]

[catnamedspot]

UPDATE. I just got all my questions answered regarding my topic. I will leave up the post in case it is helpful to others.


I've read several articles on how to purchase CDs and I want to see if I'm correct on my understanding:

-When you buy a brokered CD - you are buying it from another person and not the bank.

-When you buy a brokered CD - the seller is turning it over to you (like a car title) and all the interest will be coming directly from the bank after you buy it.

-At Vanguard (Schwab, etc), new issues are not brokered issues (even though they are in a brokerage account). Brokered only means you bought it from a previous owner (and not the bank)

-When you buy a preowned brokered CD (vs. new) through places like VG, they don't own the CD. All they are doing is matching people up (like ebay does).

-When you buy a new issued CD (vs. brokered) through places like VG, they actually own the CD.

-You might get a better or same deal buying a new Issue at VG (vs the bank issuing it to you directly) because the bank gives VG a better rate for buying bulk.

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.

-Vanguard makes money on CDs (both new and brokered) by taking part of the interest rate return off the top (or a transaction fee)

-One disadvantage of buying new CDs is you have to buy them on certain dates.

Sorry for the essay. Am I correct (more or less)?

[tonyclifton]

The wiki page is pretty comprehensive and are usually well vetted. Check it out Certificate of Deposit. There is a section on Brokered CDs.

[sport]

I've read several articles on how to purchase CDs and I want to see if I'm correct on my understanding:

-When you buy a brokered CD - you are buying it from another person and not the bank.This is true if you buy one on the secondary market. An original issue is from the bank

-When you buy a brokered CD - the seller is turning it over to you (like a car title) and all the interest will be coming directly from the bank after you buy it. Yes if bought on the secondary market

-At Vanguard (Schwab, etc), new issues are not brokered issues (even though they are in a brokerage account). Brokered only means you bought it from a previous owner (and not the bank) No, all CDs in a brokerage account are brokered CDs, regardless if they are new issue or bought in the secondary market

-When you buy a preowned brokered CD (vs. new) through places like VG, they don't own the CD. All they are doing is matching people up (like ebay does). Yes

-When you buy a new issued CD (vs. brokered) through places like VG, they actually own the CD.No, you are buying it from a bank

-You might get a better or same deal buying a new Issue at VG (vs the bank issuing it to you directly) because the bank gives VG a better rate for buying bulk.No, if you get a better rate it is because the bank if offering more to brokerage customers.

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.Yes

-Vanguard makes money on CDs (both new and brokered) by taking part of the interest rate return off the top (or a transaction fee)Probably a fee.

-One disadvantage of buying new CDs is you have to buy them on certain dates.No, you can buy whatever is offered on any date, both new issue and secondary market.

Sorry for the essay. Am I correct (more or less)?Some of each.

[catnamedspot]

Thanks so much for taking the time to respond to my statements. I've read a lot - and yet I still wonder if I'm understanding it correctly. I never, ever, would have guessed how complex these things can be (for a newbie). My only experience is going to the credit union and buying a CD. But there is a lot more involved when starting to explore it more.

[alex_686]

I've read several articles on how to purchase CDs and I want to see if I'm correct on my understanding:

-When you buy a brokered CD - you are buying it from another person and not the bank.This is true if you buy one on the secondary market. An original issue is from the bank

-When you buy a brokered CD - the seller is turning it over to you (like a car title) and all the interest will be coming directly from the bank after you buy it. Yes if bought on the secondary market

-At Vanguard (Schwab, etc), new issues are not brokered issues (even though they are in a brokerage account). Brokered only means you bought it from a previous owner (and not the bank) No, all CDs in a brokerage account are brokered CDs, regardless if they are new issue or bought in the secondary market

-When you buy a preowned brokered CD (vs. new) through places like VG, they don't own the CD. All they are doing is matching people up (like ebay does). Yes

-When you buy a new issued CD (vs. brokered) through places like VG, they actually own the CD.No, you are buyin g it from a bank

-You might get a better or same deal buying a new Issue at VG (vs the bank issuing it to you directly) because the bank gives VG a better rate for buying bulk.No, if you get a better rate it is because the bank if offering more to brokerage customers.

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.Yes

-Vanguard makes money on CDs (both new and brokered) by taking part of the interest rate return off the top (or a transaction fee)Probably a fee

-One disadvantage of buying new CDs is you have to buy them on certain dates.No, you can buy whatever is offered on any date, both new issue and secondary market.

Sorry for the essay. Am I correct (more or less)?Some of each

2 points.

You are actually probably buying it directly from Vanguard. The process is closer to that of a used car lot. The used car dealer buys old cars, warehouses then, then resells them.

They don’t so much make money on fees, but rather on mark-ups. You won’t see the mark up on the trade ticket.

[alex_686]

Thanks so much for taking the time to respond to my statements. I've read a lot - and yet I still wonder if I'm understanding it correctly. I never, ever, would have guessed how complex these things can be (for a newbie). My only experience is going to the credit union and buying a CD. But there is a lot more involved when starting to explore it more.

Having worked behind the scenes, bonds and CDs work almost identical. Not saying it is simple, just identical.

[Geologist]

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.

Sorry for the essay. Am I correct (more or less)?

You didn't make clear when you wrote "exact same CD" what you meant. If a bank fails, then various rules change and the interest rate on a CD can change too. In my experience, what happens to a brokered CD is that you receive the principal and accrued interest in your settlement or core account (and therefore you no longer have the CD no matter how much longer it had to run). If you buy a CD directly from a bank, in most cases, the FDIC arranges for a healthy bank to takeover the failed bank. When that occurs, the healthy bank can change the interest rate on your CD starting on the date they take it over (your accrued interest at the original rate remains). You generally have the right, however, to withdraw your principal and accrued interest without penalty rather than take the new interest rate.

[typical.investor]

I've read several articles on how to purchase CDs and I want to see if I'm correct on my understanding:

-When you buy a brokered CD - you are buying it from another person and not the bank.

-When you buy a brokered CD - the seller is turning it over to you (like a car title) and all the interest will be coming directly from the bank after you buy it.

-At Vanguard (Schwab, etc), new issues are not brokered issues (even though they are in a brokerage account). Brokered only means you bought it from a previous owner (and not the bank)

I don't think those are right. New issues from a broker are brokered CDs as well. If they weren't, you'd have to hold it at the bank the way you do with a bank issued CD which can't be moved.

-When you buy a preowned brokered CD (vs. new) through places like VG, they don't own the CD. All they are doing is matching people up (like ebay does).

VG maybe. Wells Fargo Brokerage used to buy the CDs themselves and you would buy it from their holdings.

-You might get a better or same deal buying a new Issue at VG (vs the bank issuing it to you directly) because the bank gives VG a better rate for buying bulk.

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.

Correct. The only thing that changes is the price you pay for it. If you less than par, the actual rate you receive may actually be higher than the yield of the CD. And if you pay above par, the rate you actually get will be less than the yield of the CD. But the yield rate of the CD doesn't change.

-Vanguard makes money on CDs (both new and brokered) by taking part of the interest rate return off the top (or a transaction fee)

I don't believe so. If there is a transaction fee, yes. But brokers do not skim the interest. They only change the price you pay. So Wells Fargo for instance, buy brokered CDs and holds them. They will sell you it out of their inventory and probably raise the price a little for a little profit.

This doesn't mean they had a bad price. Actually, it can be the opposite. I have a bunch of CDs (3k, 3k,5k,12k,16k etc) from when I was trying to invest $100k. These small CDs were priced very attractively so my actual yield is higher than anything I could have gotten on a $100k CD anywhere.

Times times. Sometimes directly from the bank is higher yield. Sometimes brokered CDs. It's a bit of supply and demand.

If it's not a new issue don't look at the Coupon Rate, look at the APY or yield to worse. That will show your actual rate based on the price the CD is market at (for CDs not selling at par).

-One disadvantage of buying new CDs is you have to buy them on certain dates.

Is that true? I dk. I've bought a new issues with a few weeks of accrued interest (that I had to pay for) a few weeks after issue. Maybe Vanguard works differently. I paid par for them though. Probably I was buying out of Wells Fargo investory but they were sold at par as new issue. Schwab now is offering new issues for the future which I can buy now. The market is closed and I can see all the offering so I can't verify if they have an 'new issues' with accumulated issues selling at par.

[alex_686]

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.

Sorry for the essay. Am I correct (more or less)?

You didn't make clear when you wrote "exact same CD" what you meant. If a bank fails, then various rules change and the interest rate on a CD can change too. In my experience, what happens to a brokered CD is that you receive the principal and accrued interest in your settlement or core account (and therefore you no longer have the CD no matter how much longer it had to run). If you buy a CD directly from a bank, in most cases, the FDIC arranges for a healthy bank to takeover the failed bank. When that occurs, the healthy bank can change the interest rate on your CD starting on the date they take it over (your accrued interest at the original rate remains). You generally have the right, however, to withdraw your principal and accrued interest without penalty rather than take the new interest rate.

Lets tack a different track.

When the brokerage CD is created it is given a CUSIP, just like a stock or bond. All positions of that CUSIP are identical. It doesn’t matter how often it is traded or which broker holds it, just like it doesn’t matter for stocks or bonds.

A CD directly held by the bank doesn’t have a CUSIP.

[ekid]

I've read several articles on how to purchase CDs and I want to see if I'm correct on my understanding:

-When you buy a brokered CD - you are buying it from another person and not the bank.This is true if you buy one on the secondary market. An original issue is from the bank

-When you buy a brokered CD - the seller is turning it over to you (like a car title) and all the interest will be coming directly from the bank after you buy it. Yes if bought on the secondary market

-At Vanguard (Schwab, etc), new issues are not brokered issues (even though they are in a brokerage account). Brokered only means you bought it from a previous owner (and not the bank) No, all CDs in a brokerage account are brokered CDs, regardless if they are new issue or bought in the secondary market

-When you buy a preowned brokered CD (vs. new) through places like VG, they don't own the CD. All they are doing is matching people up (like ebay does). Yes

-When you buy a new issued CD (vs. brokered) through places like VG, they actually own the CD.No, you are buyin g it from a bank

-You might get a better or same deal buying a new Issue at VG (vs the bank issuing it to you directly) because the bank gives VG a better rate for buying bulk.No, if you get a better rate it is because the bank if offering more to brokerage customers.

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.Yes

-Vanguard makes money on CDs (both new and brokered) by taking part of the interest rate return off the top (or a transaction fee)Probably a fee

-One disadvantage of buying new CDs is you have to buy them on certain dates.No, you can buy whatever is offered on any date, both new issue and secondary market.

Sorry for the essay. Am I correct (more or less)?Some of each

2 points.

You are actually probably buying it directly from Vanguard. The process is closer to that of a used car lot. The used car dealer buys old cars, warehouses then, then resells them.

They don’t so much make money on fees, but rather on mark-ups. You won’t see the mark up on the trade ticket.

THAT analogy isn't going to make anyone feel better!

[alex_686]

I've read several articles on how to purchase CDs and I want to see if I'm correct on my understanding:

-When you buy a brokered CD - you are buying it from another person and not the bank.

-When you buy a brokered CD - the seller is turning it over to you (like a car title) and all the interest will be coming directly from the bank after you buy it.

-At Vanguard (Schwab, etc), new issues are not brokered issues (even though they are in a brokerage account). Brokered only means you bought it from a previous owner (and not the bank)

I don't think those are right. New issues from a broker are brokered CDs as well. If they weren't, you'd have to hold it at the bank the way you do with a bank issued CD. They can't be moved.

-When you buy a preowned brokered CD (vs. new) through places like VG, they don't own the CD. All they are doing is matching people up (like ebay does).

VG maybe. Wells Fargo Brokerage used to buy the CDs themselves and you would buy it from their holdings.

-When you buy a new issued CD (vs. brokered) through places like VG, they actually own the CD.

I don't think so.

-You might get a better or same deal buying a new Issue at VG (vs the bank issuing it to you directly) because the bank gives VG a better rate for buying bulk.

-On the same exact CD, interest rate is always attached to that specific CD. Any interest rate the bank offers cannot be changed (no matter where you bought it or how many people have owned it) and the bank must pay you that interest rate.

Correct. The only thing that changes is the price you pay for it. If you less than par, the actual rate you receive may actually be higher than the yield of the CD. And if you pay above par, the rate you actually get will be less than the yield of the CD. But the yield rate of the CD doesn't change.

-Vanguard makes money on CDs (both new and brokered) by taking part of the interest rate return off the top (or a transaction fee)

I don't believe so. If there is a transaction fee, yes. But brokers do not skim the interest. They only change the price you pay. So Wells Fargo for instance, buy brokered CDs and holds them. They will sell you it out of their inventory and probably raise the price a little for a little profit.

This doesn't mean they had a bad price. Actually, it can be the opposite. I have a bunch of CDs (3k, 3k,5k,12k,16k etc) from when I was trying to invest $100k. These small CDs were priced very attractively so my actual yield is higher than anything I could have gotten on a $100k CD anywhere.

Times times. Sometimes directly from the bank is higher yield. Sometimes brokered CDs. It's a bit of supply and demand.

If it's not a new issue don't look at the Coupon Rate, look at the APY or yield to worse. That will show your actual rate based on the price the CD is market at (for CDs not selling at par).

-One disadvantage of buying new CDs is you have to buy them on certain dates.

Is that true? I dk. I've bought a new issues with a few weeks of accrued interest (that I had to pay for) a few weeks after issue. Maybe Vanguard works differently. I paid par for them though. Probably I was buying out of Wells Fargo investory but they were sold at par as new issue. Schwab now is offering new issues for the future which I can buy now. The market is closed and I can see all the offering so I can't verify if they have an 'new issues' with accumulated issues selling at par.

This is the standard process.

The bank will put out a solicitation letter on Monday. Their network of brokers will put out the offer. Everyone needs to get in their orders in by Thursday. Limits to quantity apply.

Next Monday the bank creates the CDs. i.e. sets up the CUSIPs, DTC, ect. At this point the quantity is fixed.

On Tuesday the CDs settle. Cash is exchanged and interest starts accruing.

[typical.investor]

2 points.

You are actually probably buying it directly from Vanguard. The process is closer to that of a used car lot. The used car dealer buys old cars, warehouses then, then resells them.

They don’t so much make money on fees, but rather on mark-ups. You won’t see the mark up on the trade ticket.

THAT analogy isn't going to make anyone feel better!

But you can see the APY/price-to-worse and see what your return will be. You can compare what your return will be to what is offered at banks or what is offered for other brokered CDs.

If a broker is making $x in mark-up, but the brokered CD is returning more than anything else offered either directly from a bank or as a brokered CD, then why do you care what $x is?

Similarly, I don't know how much Walmart makes off my food purchases, all I know is that it is the best price (for me among my alternatives here at least). I am ok with that.

For new issues, since the CUSIP is the same, the yield can't be changed, and they are selling at par, I'd assume that every broker is receiving the same mark up.

[alex_686]

For new issues, since the CUSIP is the same, the yield can't be changed, and they are selling at par, I'd assume that every broker is receiving the same mark up.

Not necessarily but generally yes. If there is a difference, it would be the issuing bank that would receive fewer funds from the CD.