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Here’s where investors made a ‘risk-free’ 6.6% return in the past four U.S. recessions
conversely, if issue price is more than 100, the YTM will be lower than the advertised yield.
Exactly. Same as with a bond. Note that if you buy a CD on the secondary market at a premium (price over 100), the excess amount is not insured. However, it appears that if you buy a new issue, even through a brokerage, at a premium, the full value is likely insured. At least I haven't yet found anything to the contrary.
A bit more on FDIC insurance from (who else) the FDIC:
If you buy a CD directly from a bank and it fails, you will receive an insurance payment faster than you would if you purchased it through a broker. With brokered CDs, the FDIC must first obtain from the broker the name and deposit amount for each CD investor. Then the FDIC will send the deposit insurance check to the broker, who in turn is responsible for distributing the payment to the consumer, and that can result in further delays. Note that the FDIC does not supervise or become involved in the arrangements between brokers and consumers.
Brokerages can move CDs very quickly - as evidenced by people reporting that brokerage offerings are selling out. As Yogi mentioned, that speed is of value to banks, which helps explain why brokerages are often able to negotiate better rates (even after accounting for the brokerage fees) than one gets directly from banks.
Brokerage firms can negotiate favorable CD prices with banks because of the volume of CDs they can purchase at one time.
You're not going to sucker me into going through SIPC vs FDIC again (See thread on sweep accounts).
Suffice to say that brokered CDs are actually securities and thus theft of CDs would be covered by SIPC. The value of the CDs themselves is covered by FDIC.
CDs qualify as "securities" under the Securities Investor Protection Act, are eligible for SIPC protection as such, and therefore are subject to the $500,000 protection limit applicable to securities, not the $250,000 limit applicable to cash.
To state the obvious , there are so many financially smart people here at MFO. Thanks a lot for all the CD information. I'm a better and more observant buyer today than I was 2 days ago.
If you buy a CD directly from a bank and it fails, you will receive an insurance payment faster than you would if you purchased it through a broker. With brokered CDs, the FDIC must first obtain from the broker the name and deposit amount for each CD investor. Then the FDIC will send the deposit insurance check to the broker, who in turn is responsible for distributing the payment to the consumer, and that can result in further delays. Note that the FDIC does not supervise or become involved in the arrangements between brokers and consumers.
@msf- I've been mulling this over in the back of my brainpan ever since you wrote that. It exposed a potential single-point of failure that I hadn't even considered: What happens if a brokerage goes belly-up? Who, or what entity (if any) would be responsible for getting those CDs back into the hands of the retail owners?
That was a quote from the FDIC. Brokered CDs are securities, so if you held them in a brokerage that went belly-up, they'd be handled by the SIPC the same as MMF shares, or TSLA stock.
Lewis provided a link explaining this in a post above.
It seems a misnomer to call any Treasury but ultrashort term T-bills risk-free as in the “risk-free rate.” If you don’t own a 10-year Treasury until maturity, you can have significant losses if you need to sell it before maturity. Locking up one’s money is a risk that creates other risks—liquidity, price, emergency fund depletion, missed opportunity risks. Is anything risk-free if you need to hold it? In the bond world, this risk is more straightforward than it appears in CDs or real estate, the latter being the ultimate long-term illiquid investment. It’s “duration risk.” Until T-bills yield 6.6%, there is no “risk-free” 6.6% return as the headline described.
If you're alive there is always a risk that something may happen that causes you to not be. In that context there is no "risk-free" anything, any time. It's all a matter of degree and probability.
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Exactly. Same as with a bond. Note that if you buy a CD on the secondary market at a premium (price over 100), the excess amount is not insured. However, it appears that if you buy a new issue, even through a brokerage, at a premium, the full value is likely insured. At least I haven't yet found anything to the contrary.
A bit more on FDIC insurance from (who else) the FDIC: https://www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html
Brokerages can move CDs very quickly - as evidenced by people reporting that brokerage offerings are selling out. As Yogi mentioned, that speed is of value to banks, which helps explain why brokerages are often able to negotiate better rates (even after accounting for the brokerage fees) than one gets directly from banks. https://www.kurtalawfirm.com/brokered-cds/
That description of brokerage firms as (initial) purchasers of CDs seems to be saying that the brokerages are underwriting the CDs. Here's Fidelity's page describing its brokered CD underwriting service.
https://capitalmarkets.fidelity.com/brokered-certificate-of-deposit-underwriting
Learnt something new everyday day... Happy holidays
(See thread on sweep accounts).
Suffice to say that brokered CDs are actually securities and thus theft of CDs would be covered by SIPC. The value of the CDs themselves is covered by FDIC. https://www.sipc.org/for-investors/investor-faqs#is-a-certificate-of-deposit-cd-treated-like-cash
https://www.mutualfundobserver.com/discuss/discussion/60296/vanguard-cash-plus-savings-fdic-insured
I continued on with my research and finally put a multi-post info on FDIC, NCUA, SIPC on my site,
https://ybbpersonalfinance.proboards.com/thread/366/fdic-ncua-sipc-insurance
Lewis provided a link explaining this in a post above.
OJ
If you're alive there is always a risk that something may happen that causes you to not be. In that context there is no "risk-free" anything, any time. It's all a matter of degree and probability.