Is Monthly Interest Payment from Brokered CD a Bad Thing?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
dbc47
Posts: 484
Joined: Thu Mar 01, 2007 10:02 am

Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by dbc47 »

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?
Corvidae
Posts: 183
Joined: Tue May 10, 2022 1:11 am

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by Corvidae »

Cash payments carry reinvestment risk, but if you plan to spend them, this would not apply.
exodusNH
Posts: 10350
Joined: Wed Jan 06, 2021 7:21 pm

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by exodusNH »

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?
Not if you need the money.
secondopinion
Posts: 6011
Joined: Wed Dec 02, 2020 12:18 pm

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by secondopinion »

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.
User avatar
Topic Author
dbc47
Posts: 484
Joined: Thu Mar 01, 2007 10:02 am

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by dbc47 »

Corvidae wrote: Wed May 18, 2022 2:55 pm Cash payments carry reinvestment risk, but if you plan to spend them, this would not apply.
I don't understand how an interest payment on a CD has a reinvestment risk?
User avatar
Topic Author
dbc47
Posts: 484
Joined: Thu Mar 01, 2007 10:02 am

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by dbc47 »

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).
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?
The taxes on the interest will have to be paid regardless if the interest is paid monthly or at maturity, right?
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by alex_686 »

dbc47 wrote: Wed May 18, 2022 3:52 pm 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?
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.
secondopinion
Posts: 6011
Joined: Wed Dec 02, 2020 12:18 pm

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by secondopinion »

dbc47 wrote: Wed May 18, 2022 3:52 pm
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).
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?
The taxes on the interest will have to be paid regardless if the interest is paid monthly or at maturity, right?
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.

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.
mega317
Posts: 5705
Joined: Tue Apr 19, 2016 10:55 am

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by mega317 »

alex_686 wrote: Wed May 18, 2022 3:59 pm However, the reported annualized yield of the CD assumes that all coupons are reinvested back into the CD at the reported annualized yield.
Good to know. And this is true for brokered CDs in which you can't reinvest the interest payments?
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by alex_686 »

mega317 wrote: Wed May 18, 2022 4:02 pm
alex_686 wrote: Wed May 18, 2022 3:59 pm However, the reported annualized yield of the CD assumes that all coupons are reinvested back into the CD at the reported annualized yield.
Good to know. And this is true for brokered CDs in which you can't reinvest the interest payments?
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.
User avatar
Topic Author
dbc47
Posts: 484
Joined: Thu Mar 01, 2007 10:02 am

Re: Is Monthly Interest Payment from Brokered CD a Bad Thing?

Post by dbc47 »

Thanks for the feedback. I appreciate the help.

😁
Post Reply