Brokered CD – What it is and How it Works

 

A brokered CD is a certificate of deposit that is sold through a brokerage firm or other financial intermediary who offers clients CDs from multiple different institutions.  This is in contrast to a traditional bank CD where the bank offers their client’s CDs directly from the bank and no other options.  Here is a video overview with the text transcript below the video:

 

To see a list of high yielding CDs go here.

 

Brokers will charge you a fee for their services in trying to find better CD deals for you. This may be a fixed fee or a percentage of the total deposit you want to make. Typically, the fee is included  into the annual percentage yield (APY) of the brokered CD. The yield you see will then depend not only on how much the financial institution issuing the CD wants to offer, but also on how much the broker or any other intermediary wants to make on the transaction.

Brokered CD vs. Standard CD

In many respects, a brokered CD is the same as a CD you would buy directly from your bank or credit union. One difference between most other CD’s however is that  you can trade most brokered CDs in the secondary market where, like other tradeable CDs, they behave like bonds.  This means that interest rates going up will decrease the market value of a brokered CD and vice versa.  Like other types of CDs, If you hold a brokered CD to maturity then the value of your CD is not affected by interest rate fluctuations.

One aspect requires particular attention. You may be dealing via an intermediary for buying your brokered CD, but you should still verify that the issuing institution is safe; an FDIC-insured bank or an NCUA-insured credit union, for example. If a brokered CD interest rate being offered is significantly above comparable products, make sure you know what risk is attached and if this is acceptable to you.

Brokered CDs vs Auction CDs

Another approach that gives you the opportunity to earn higher yields is auction CDs. An example of this is Zions Direct CD Auctions with its listings of CD offerings from different financial institutions. The CDs are auctioned off in $1,000 units. To make a bid to buy a number of units:

  • Register with the site.  You will see multiple CDs for auction. Each CD will have a stated yield and maturity date just like a normal CD.
  • Log on to an auction of interest to you and make your bid. For example, to buy 20 units ($20,000), you might bid $19,915.  By bidding below the value of the CD at maturity, you effectively increasing your return beyond the yield being offered.
  • The site then displays information to tell you whether or not you would be sold the number of units you asked for, if the auction were to close at that instant (if so, your bid is said to be “in the money”)
  • The online bidding process is open, so that you can check the status of your bid at any time while the auction is running
  • If your bid is successful, Zions Direct contacts you after the auction closes for your payment and transfer of the units of CD to you.

 

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