Is Monthly Interest Payment from Brokered CD a Bad Thing?
Is Monthly Interest Payment from Brokered CD a Bad Thing?
I've been looking at purchasing a few brokered CDs now that interest rates are starting to rise. I will use Vanguard's Brokerage to make the purchases as I have in the past which worked well. Some CDs pay the interest at maturity but in doing some searching I've noticed that some banks pay the interest monthly. That appeals to me as it will help with monthly cash flow. Is there any disadvantage in taking the interest payments monthly?
Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
Cash payments carry reinvestment risk, but if you plan to spend them, this would not apply.
Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
Not if you need the money.dbc47 wrote: ↑Wed May 18, 2022 2:45 pm I've been looking at purchasing a few brokered CDs now that interest rates are starting to rise. I will use Vanguard's Brokerage to make the purchases as I have in the past which worked well. Some CDs pay the interest at maturity but in doing some searching I've noticed that some banks pay the interest monthly. That appeals to me as it will help with monthly cash flow. Is there any disadvantage in taking the interest payments monthly?
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Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
Monthly payouts technically reduce the interest rate sensitivity of the CD. If it is in a taxable account, it also allows for taxes on the CD to be paid out of it (instead of having to come up with the money otherwise). In a tax-advantaged account, it makes little difference in my opinion (especially while yields are not that high).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
I'm sorry, but I don't understand how a CD can have interest rate sensitivity? The interest rate remains constant throughout the life of the CD doesn't it?secondopinion wrote: ↑Wed May 18, 2022 3:15 pm Monthly payouts technically reduce the interest rate sensitivity of the CD. If it is in a taxable account, it also allows for taxes on the CD to be paid out of it (instead of having to come up with the money otherwise). In a tax-advantaged account, it makes little difference in my opinion (especially while yields are not that high).
The taxes on the interest will have to be paid regardless if the interest is paid monthly or at maturity, right?
Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
Two points.
The value of the CD changes with interest rates, just like a bond. That the bank doesn't bother to report it is besides the point.
You are right about the coupon yield. However, the reported annualized yield of the CD assumes that all coupons are reinvested back into the CD at the reported annualized yield. Taking coupon cash out breaks that assumption.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
If the CD is brokered, then one could sell it. The difference is minor, but in theory the price stays ever so slightly more stable with the payouts; the rate does not change, but the reinvestment of the payouts differs.dbc47 wrote: ↑Wed May 18, 2022 3:52 pmI'm sorry, but I don't understand how a CD can have interest rate sensitivity? The interest rate remains constant throughout the life of the CD doesn't it?secondopinion wrote: ↑Wed May 18, 2022 3:15 pm Monthly payouts technically reduce the interest rate sensitivity of the CD. If it is in a taxable account, it also allows for taxes on the CD to be paid out of it (instead of having to come up with the money otherwise). In a tax-advantaged account, it makes little difference in my opinion (especially while yields are not that high).
The taxes on the interest will have to be paid regardless if the interest is paid monthly or at maturity, right?
Yes, taxes are due either way; my statement was that you can pay the taxes out of the payouts rather than getting the money otherwise since the at maturity CD does not pay out (yet you are still on the hook for taxes on interest annually).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
It is true for everything. It allows for easy comparison between different products. Say bonds.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?
Thanks for the feedback. I appreciate the help.