Can brokered CDs lose money?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
kmd22
Posts: 10
Joined: Mon Apr 18, 2022 8:20 pm

Can brokered CDs lose money?

Post by kmd22 »

Hi,

I purchased several CDs for the first time this fall in my Schwab brokerage. These are new issue, not purchased on the secondary market, and from either Discover or Schwab. They range from 1 year, 18m, or 2 year CDs with interest rates between 4.5 - 5%.

When I peak in my account, I can't help but notice that one of these has lost value. We are talking like a dollar so I'm not losing sleep over it, just wanting to understand the product I bought. It is a one year CD and the only thing that appears different for this CD vs. the others I purchased is that this one's coupon rate is at maturity, where as the others are semi-annual. I suspect this is the source but am curious... will it still return the 4.55% interest rate by maturity?

Thank you.
ut2sua
Posts: 144
Joined: Tue Apr 21, 2020 9:19 pm

Re: Can brokered CDs lose money?

Post by ut2sua »

kmd22 wrote: Thu Jan 26, 2023 4:38 pm Hi,

I purchased several CDs for the first time this fall in my Schwab brokerage. These are new issue, not purchased on the secondary market, and from either Discover or Schwab. They range from 1 year, 18m, or 2 year CDs with interest rates between 4.5 - 5%.

When I peak in my account, I can't help but notice that one of these has lost value. We are talking like a dollar so I'm not losing sleep over it, just wanting to understand the product I bought. It is a one year CD and the only thing that appears different for this CD vs. the others I purchased is that this one's coupon rate is at maturity, where as the others are semi-annual. I suspect this is the source but am curious... will it still return the 4.55% interest rate by maturity?

Thank you.
No, if you hold the CDs to maturity. The value shown reflects what you may get if you choose to sell your CD today. If you keep your CDs to maturity, you will get the promised x% in interest too.
Atgard
Posts: 554
Joined: Wed Apr 09, 2014 2:02 pm

Re: Can brokered CDs lose money?

Post by Atgard »

If you hold it to maturity, then no, it will pay the full par value back at maturity (plus the interest you collect along the way).

But if you choose to sell early, then the price could fluctuate up or down depending on movements in interest rates.
User avatar
arcticpineapplecorp.
Posts: 15014
Joined: Tue Mar 06, 2012 8:22 pm

Re: Can brokered CDs lose money?

Post by arcticpineapplecorp. »

from the wiki:
Brokered CDs are intended to be held until maturity.[note 1] CDs may be sold prior to maturity on the secondary market (which may be limited). All brokered CDs will fluctuate in value between purchase date and maturity date. Thus, any CD sold prior to maturity may be subject to a substantial gain or loss. A brokered CD's value can decline due to rising interest rates, and longer maturities have higher interest rate risk. See: Vanguard cd question [Brokered CDs] (forum discussion) for additional information. Ask in the forum if you are unsure.

https://www.bogleheads.org/wiki/Certifi ... okered_CDs
I find it good practice to ask questions before buying things I don't understand. Always check the wiki first.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
aristotelian
Posts: 12262
Joined: Wed Jan 11, 2017 7:05 pm

Re: Can brokered CDs lose money?

Post by aristotelian »

They could lose money if you sell them before maturity and rising rates have lowered their value. If you hold to maturity they will return principal plus remaining interest payments.
User avatar
typical.investor
Posts: 5245
Joined: Mon Jun 11, 2018 3:17 am

Re: Can brokered CDs lose money?

Post by typical.investor »

kmd22 wrote: Thu Jan 26, 2023 4:38 pm Hi,

I purchased several CDs for the first time this fall in my Schwab brokerage. These are new issue, not purchased on the secondary market, and from either Discover or Schwab. They range from 1 year, 18m, or 2 year CDs with interest rates between 4.5 - 5%.

When I peak in my account, I can't help but notice that one of these has lost value. We are talking like a dollar so I'm not losing sleep over it, just wanting to understand the product I bought. It is a one year CD and the only thing that appears different for this CD vs. the others I purchased is that this one's coupon rate is at maturity, where as the others are semi-annual. I suspect this is the source but am curious... will it still return the 4.55% interest rate by maturity?

Thank you.
Rest assured. You will get the 4.55%.

In the meantime, the value will fluctuate based on rates. As maturity approaches, the value will converge back to par and you will end up with the 4.5% interest rate.
Harmanic
Posts: 935
Joined: Mon Apr 04, 2022 10:19 am

Re: Can brokered CDs lose money?

Post by Harmanic »

kmd22 wrote: Thu Jan 26, 2023 4:38 pm Hi,

I purchased several CDs for the first time this fall in my Schwab brokerage. These are new issue, not purchased on the secondary market, and from either Discover or Schwab. They range from 1 year, 18m, or 2 year CDs with interest rates between 4.5 - 5%.

When I peak in my account, I can't help but notice that one of these has lost value. We are talking like a dollar so I'm not losing sleep over it, just wanting to understand the product I bought. It is a one year CD and the only thing that appears different for this CD vs. the others I purchased is that this one's coupon rate is at maturity, where as the others are semi-annual. I suspect this is the source but am curious... will it still return the 4.55% interest rate by maturity?

Thank you.
The CDs might show a negative return on your brokerage account, but that is only if you sell at the market rate for that day. Otherwise, they redeem at par value + interest at maturity. You just need to ignore the red on your statement.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
Topic Author
kmd22
Posts: 10
Joined: Mon Apr 18, 2022 8:20 pm

Re: Can brokered CDs lose money?

Post by kmd22 »

Thank you for the helpful replies. I find it intriguing that it seems this one product would hypothetically not do as well on the secondary market as the others I purchased, but I haven't kept an eye on current CD rates so perhaps it is not quite as competitive. It has consistently been this one CD showing red vs. the others. Glad to know that as long as I hold it until maturity, all will be as intended.
bmcgin
Posts: 176
Joined: Tue Jan 10, 2023 7:15 pm

Re: Can brokered CDs lose money?

Post by bmcgin »

One thing to watch out for when buying CDs is the settlement date. Sometimes they are 15 days in the future which for me (in Etrade) means I get zero interest for 15 days. So that's one way to lose money with brokered CDs.
water2357
Posts: 654
Joined: Sat Sep 12, 2020 9:24 am

Re: Can brokered CDs lose money?

Post by water2357 »

On E Trade is the money actually swept out of your presumably dividend/interest earning settlement fund 15 days before settlement?

Per Vanguard, any monies not shown as swept out of the settlement fund continue to earn dividends until they are swept out which would not be until the settlement date. A buy is recorded prior to settlement but the actual money does not leave the settlement fund until settlement.
Post Reply