Brokered CDs - often better return secondary market

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dm200
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Re: Brokered CDs - often better return secondary market

Post by dm200 » Tue Apr 24, 2018 4:56 pm

junesen wrote:
Mon Jan 22, 2018 6:25 pm
dm200 wrote:
Sat Jan 20, 2018 2:07 pm
#1 - Maybe, but I thought it was not the banks selling on the secondary market. Or is it, sometimes?
I don't know for sure. I bought some new issues a couple of weeks back and I still see the same CUSIP on the secondary market. I am assuming that the banks are selling the "unsold" portions on the secondary market (it could be someone who just bought it and is turning around immediately to sell it at a loss?)
OK. Yes, sorry about that. I agree that the banks may just be doing this to get rid of the remaining unsold inventory.

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Kevin M
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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Tue Apr 24, 2018 5:37 pm

TreadLightly wrote:
Tue Apr 24, 2018 4:01 pm
I'm new to this and a tad confused. I thought YTM factors in the discounted price, thus the higher YTM for a CD with a lower original yield.

So when I'm shopping secondary CDs, I should just have to compare YTM and factor in fees, right?
Yes, YTM factors in price as well as coupon. So higher yield than new-issue if you're buying what is a new issue (or was until a day or two ago) at less than 100 after commission, which has not been uncommon lately, especially if paying only $1 per CD. This is for CDs in the 2-year to 3-year range, which is all I've been looking at lately.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Tue Apr 24, 2018 5:41 pm

dm200 wrote:
Tue Apr 24, 2018 4:56 pm
junesen wrote:
Mon Jan 22, 2018 6:25 pm
dm200 wrote:
Sat Jan 20, 2018 2:07 pm
#1 - Maybe, but I thought it was not the banks selling on the secondary market. Or is it, sometimes?
I don't know for sure. I bought some new issues a couple of weeks back and I still see the same CUSIP on the secondary market. I am assuming that the banks are selling the "unsold" portions on the secondary market (it could be someone who just bought it and is turning around immediately to sell it at a loss?)
OK. Yes, sorry about that. I agree that the banks may just be doing this to get rid of the remaining unsold inventory.
I've seen new issue that settles on Thursday no longer offered on Tuesday, but available on secondary market on Tuesday and Wednesday at less than 100, even after $1/CD commission. I have no idea if this is the bank unloading its excess inventory, or maybe a dealer doing so.

Kevin
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Re: Brokered CDs - often better return secondary market

Post by AAA » Tue Apr 24, 2018 7:22 pm

If you buy a secondary market CD below/above par, is there a capital gain/loss when it matures? If so, then I assume this should be an additional consideration above and beyond yield-to-maturity.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Tue Apr 24, 2018 8:14 pm

AAA wrote:
Tue Apr 24, 2018 7:22 pm
If you buy a secondary market CD below/above par, is there a capital gain/loss when it matures? If so, then I assume this should be an additional consideration above and beyond yield-to-maturity.
The gain or loss is factored into YTM. That's why YTM is different than coupon rate if you don't buy at 100.

In a tax-advantaged account there are no tax-reporting issues, so yield is all that matters with respect to expected return.

In a taxable account you accrue the discount or premium in calculating tax on your coupon interest, but this isn't really a factor in your before-tax return, which again is driven mainly by the initial yield.

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Re: Brokered CDs - often better return secondary market

Post by AAA » Wed Apr 25, 2018 8:56 am

Kevin M wrote:
Tue Apr 24, 2018 8:14 pm
In a taxable account you accrue the discount or premium in calculating tax on your coupon interest, but this isn't really a factor in your before-tax return, which again is driven mainly by the initial yield.
I think I understand the first part of your post - the YTM takes account of the loss or gain you will have when the CD matures - but I'm a bit fuzzy about the above sentence. Please elaborate or provide a link that discusses this.

Also, in a taxable account does one have a capital loss or gain to report when the CD matures?

Thank you.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Wed Apr 25, 2018 11:39 am

The YTM displayed on the initial list does not include the effects of the brokerage fee. Only when you select to purchase is that taken into account.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Wed Apr 25, 2018 1:06 pm

AAA wrote:
Wed Apr 25, 2018 8:56 am
Kevin M wrote:
Tue Apr 24, 2018 8:14 pm
In a taxable account you accrue the discount or premium in calculating tax on your coupon interest, but this isn't really a factor in your before-tax return, which again is driven mainly by the initial yield.
I think I understand the first part of your post - the YTM takes account of the loss or gain you will have when the CD matures - but I'm a bit fuzzy about the above sentence. Please elaborate or provide a link that discusses this.

Also, in a taxable account does one have a capital loss or gain to report when the CD matures?

Thank you.
I will be dealing with for 2018 tax year, but from memory (you can look it up in IRS publications--Pub 550 I think ...

For a market discount, you can either accrue it annually or report it in the year of maturity, but either way it counts as ordinary income. Reporting in the year of maturity typically will be more beneficial, since you delay reporting the income (time value of money).

Interestingly, market discount is taxable even for tax-exempt bonds (munis), but there is a de minimis amount of market discount below which you can just ignore it (0.25% market discount per full year until maturity). There is more to it than this, but this isn't relevant to CDs.

For market premium I think you must accrue (amortize) annually--or maybe that's just for munis, but even if you could report it as negative income at maturity, typically it would be more beneficial to report the amortized amount as negative income each year, to get the benefit sooner (time value of money). And even if you could count it as a long-term capital loss, typically it would be more beneficial to report it as negative income on the interest portion of Schedule B.

There are intricacies depending on the type of bond (in the generic sense, including CDs), e.g., tax-exempt or not, and when it was bought (the regulations have changed several times over the years), but that's probably more than you need to know at this point.

Anyone who wants to can look it up in the IRS pub and clarify anything I've gotten wrong from memory.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Wed Apr 25, 2018 1:08 pm

dm200 wrote:
Wed Apr 25, 2018 11:39 am
The YTM displayed on the initial list does not include the effects of the brokerage fee. Only when you select to purchase is that taken into account.
Correct. Or you can calculate it yourself in a spreadsheet with the PRICE function by adding 0.1 or 0.2 to the price, depending on your commission ($1 or $2 per bond/CD). This is the way I do it, because I evaluate perhaps 200 or more CDs at once looking for the best yield premiums.

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Wed Apr 25, 2018 1:09 pm

TreadLightly wrote:
Tue Apr 24, 2018 4:01 pm
I'm new to this and a tad confused. I thought YTM factors in the discounted price, thus the higher YTM for a CD with a lower original yield.

So when I'm shopping secondary CDs, I should just have to compare YTM and factor in fees, right?
Yes - you are correct, as best I understand.

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Re: Brokered CDs - often better return secondary market

Post by AAA » Thu Apr 26, 2018 9:01 am

Kevin M wrote:
Wed Apr 25, 2018 1:06 pm
For a market discount, you can either accrue it annually or report it in the year of maturity, but either way it counts as ordinary income.
Thanks for your response and I think I'm getting the main points. Let's focus on a CD bought at discount in a taxable account and held until maturity. If one chooses the annual accrual method, do brokerages such as Vanguard and Fidelity provide the information needed or does one have to calculate it?

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Re: Brokered CDs - often better return secondary market

Post by dm200 » Thu Apr 26, 2018 9:26 am

AAA wrote:
Thu Apr 26, 2018 9:01 am
Kevin M wrote:
Wed Apr 25, 2018 1:06 pm
For a market discount, you can either accrue it annually or report it in the year of maturity, but either way it counts as ordinary income.
Thanks for your response and I think I'm getting the main points. Let's focus on a CD bought at discount in a taxable account and held until maturity. If one chooses the annual accrual method, do brokerages such as Vanguard and Fidelity provide the information needed or does one have to calculate it?
Note that the FDIC insurance is on the face value of the CD. If you buy at a premium, you have a small amount "at risk", while if you buy at a discount - you get more than you paid.

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Re: Brokered CDs - often better return secondary market

Post by Kevin M » Thu Apr 26, 2018 12:33 pm

AAA wrote:
Thu Apr 26, 2018 9:01 am
Kevin M wrote:
Wed Apr 25, 2018 1:06 pm
For a market discount, you can either accrue it annually or report it in the year of maturity, but either way it counts as ordinary income.
Thanks for your response and I think I'm getting the main points. Let's focus on a CD bought at discount in a taxable account and held until maturity. If one chooses the annual accrual method, do brokerages such as Vanguard and Fidelity provide the information needed or does one have to calculate it?
I don't know, since I only started buying brokered CDs late last year, and did not receive any distributions, so nothing included on 1099-INT. But if you look at Form 1099-INT, Box 10 is for market discount, and is reported for covered securities. I assume CDs (purchased since the changes in broker IRS reporting requirements) are covered securities. I don't know if they report it annually or at maturity.

Either Treasuries are not covered securities or Vanguard reports market discount at maturity, because my parents received interest in 2017 from a Treasury bought at a discount at Vanguard (that matures in 2018), and nothing was reported in box 10. The interest was reported in box 3.

Another thing you have to account for is accrued interest. Vanguard and Fidelity report accrued interest in their consolidated 1099 package for the tax year in which the security is purchased. For the Treasury that paid interest, Vanguard did not subtract accrued interest from the amount reported in Box 3, so I had to adjust for accrued interest using the functionality to do so in my tax software.

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