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I was reading on my Ameritrade account regarding CDs that can be purchased and held in my Ameritrade account.

I was unable to find the penalty on any of the CDs listed for early withdrawal...

We do not need income from these, only better interest than most banks are now paying, and the safety of CDs rather than investing more into the stock market/bonds.

We are 68 & 69 and have now been retired for 18 years. Live comfortably, no mortgage or car payments. Necessary income is covered by SS for both of and VA disability. Any additional income goes to cover all the "play" things we enjoy doing.

What pros and cons are there to purchasing CDs from Ameritrade or ones that are on the secondary market?
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Sir,

Buying CDs in the secondary market --especially in an environment of nearly zero interest-rates-- is a really stupid thing to do.

But don’t just take my word for it. Let’s work though some actual examples. TD is offering a mid-range CD, GE Cap’s 2.950’s of ’23, at 100. A commish will have to be paid. That will drop the achieved yield a bit. But let’s ignore that fact for a while. So that price and rate becomes a benchmark. A 10-year CD, from an A1/AA+ rated company, can be bought at a price that would yield roughly 2.95%.

However, some credit unions (such as mine) offer high-yield checking accounts that offer around 2.25% for the first $25k-$30k of deposits, and if you go over to the corporate side of that same issuer and out on the yield-curve a bit, you can pick up another 140 bps. However, screwing around with debt instruments that are explicitly (or implicitly) principal-protected is a sure way to lose exactly what one is trying to protect, namely, purchasing-power.

E.g., if you buy a CD offering 6% (which you won’t be able to find these days) and if your combo Fed/State tax rate on ordinary-income is 25%, you net is a mere 4.5%, from which you still have to subtract your personally-experienced inflation rate, which is probably trending near 6%. Opps. A net 4.5% after taxes, minus a not unrealistic 6% inflation rate, means --in effect-- you are paying someone 1.5% per year to warehouse your currency for you.

That --I’d argue-- is a clear example of financial laziness and stupidity when is it isn’t hard to find investments that offer a real rate of return. E.g., two weeks ago, I put on positions in gold, silver, and ag commodities on which I’m averaging gains of about 30 bps per market day. By contrast, a CD that offers 5% per year (which you won’t find) offers a mere 2 bps per market day. So, that becomes a benchmark for making risk-adjusted comparisons. An instrument with no default-risk, but with serious tax-risk and inflation-risk, offers at best about 2 bps per market day.

But it is very easy to find opportunities that offer 20 to 40 bps per market day that have no greater tax-risk or inflation-risk. For sure, those opportunities come with market-price risk (which amounts to default-risk), but the buyer is being well-compensated. So, choosing to buy CD is to choose to accept some risks, but not others, and to be poorly paid for doing so.

Money is a commodity, no different than wheat, copper, lumber, or orange juice. In today’s market, with the Fed/Treasury cartel running the printing presses 24/7, the price of money is so low that the stuff is almost free. Hence, no one is willing to pay up to buy or borrow it. Hence, interest-rates for debt instrument that carry little credit-risk are low, and they are likely to remain low for an extended period, which is Not a Good Thing, for a whole lot of reasons. But that’s the present-day landscape, and a rational investor looks elsewhere than CDs to park cash.

Charlie
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First of all Charlie, it's Ma'm to you!

Secondly, I am neither lazy nor stupid. I have been a member of TMF since 2001 , and have gained information and knowledge from many of the posters here that graciously give of their experience in a thoughtful and kind manner.

Unfortunately you do not qualify on any of those counts.

Stand down Charlie.
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Charlie, you proved my point with the PM email you just sent me.

Whether or not you like it Charlie, it is STILL M'am to you.

As for your PM email suggestion, I can only wish I was allowed to post it here, but since I am not able to use the language you just deemed acceptable in an email, I suggest you do exactly the same.

Kitty
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I was unable to find the penalty on any of the CDs listed for early withdrawal...

There generally isn't a penalty for early withdrawal for CDs on the secondary market, but to cash out of those CDs before maturity, you will have to sell the CD back into the secondary market - generally getting a lower price than you would have paid, and possibly paying a commission besides (in addition to the commission you paid when you purchased).

What pros and cons are there to purchasing CDs from Ameritrade or ones that are on the secondary market?

If you pay above par in order to get the higher interest rate, the amount above par is a loss to you in case the CD is called, matures, or the issuer is shut down by the FDIC.

You need to check the call provisions on the CD.

You need to make sure that the CD actually is insured by the FDIC.

You might want to check other brokerages to be sure you are getting a reasonable return.

AJ
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Thank you, just the info I was looking for. Now I have a starting point for further investigation.
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I did just the opposite at Fidelity and I would imagine it works the same way at Ameritrade.

I owned several CDs. I contacted the Fixed Income department and told them that I was interested in selling the CDs (the call date was still 3 years away). They emailed me quotes the next day, which I could either accept or reject.

The quotes that I got payed me the face value of the CDs plus 1/3 of the total interest I would have collected if I held to maturity.

Like I said, these CDs were 3 years from their call date, so I actually got paid 1 year of interest for selling them. I jumped at the offer.

Milt
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There are several online sites that give CD rates from multiple sources online...bankrate.com, bankaholic.com, and others...

I believe zionsdirect.com sometimes auctions off CD's...you bid on the rate you're willing to recieve.

Quite some time ago, someone posted a link to a site that lists FDIC insured checking accounts that pay interest. It could probably be found with a google search.

If you do change your mind, I'm sure some municipal bond fund managers will help you purchase some debt issued by Detroit, Michigan.

Or if you'd rather just spend it, I understand cruise ships can be a fun experience.
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The quotes that I got payed me the face value of the CDs plus 1/3 of the total interest I would have collected if I held to maturity.

I assume your CDs were at rates above the currently available rates for 3 year CDs?

Like I said, these CDs were 3 years from their call date, so I actually got paid 1 year of interest for selling them. I jumped at the offer.

And when Fidelity sold the CDs to someone else, they probably sold them at a price above face value so that the buyer would get only about 1 to 1 1/2 years of the interest you would have received had you held until maturity, making money on the spread, in addition to any commissions.

For those who have CDs and want to get their principal back prior to maturity, selling them to a broker can be a more profitable way to get out, rather than breaking the CD and possibly having to pay a penalty, if the interest rate on the CD is above current rates. If the rates are comparable to current rates, or lower, the seller would need to calculate the numbers both ways to see if it would be cheaper for them to break the CD or sell it.

For those buying CDs in the secondary market, they need to be aware of the issues of purchasing above par, potential call dates, and the status of FDIC insurance on the CD.

AJ
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“You need to make sure that the CD actually is insured by the FDIC. “

I will echo what AJ posted. I read some of the CD’s sold in the secondary market are not covered by FDIC insurance. They are only covered for the primary purchaser. Since part of the reason you are purchasing CD’s and thus willing to accept a lower return is because of the safety it offers, it would not be prudent to forego FDIC insurance.
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I assume your CDs were at rates above the currently available rates for 3 year CDs?

The CDs were at 3.5 and 3.6% with 3 years until maturity. After the offer was made, I figured that holding on to the CDs would only yield an additional 2.4% (3.6% - 1.2% premium I got for selling).

I invested the cash in Preferred stocks yielding a lot more.

Milt
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The CDs were at 3.5 and 3.6% with 3 years until maturity. After the offer was made, I figured that holding on to the CDs would only yield an additional 2.4% (3.6% - 1.2% premium I got for selling).

Well, you don't say what the rates on 3 year CDs were at the time that you traded them in, but if they were anything close to current rates, 3 year CD rates were, at best, in the 1.4% range (according to Bankrate and FatWallet).

After paying you 102.4% of face value, Fidelity could have sold the CDs to someone at 105% of face value, and the buyer still would have netted a little over 1.9% APY (0.5% above the best currently available rates) and Fidelity would have been able to keep the extra 2.6% of the face value, plus commissions. If Fidelity was able to sell at 106% of face value, keeping 3.6% of the face value (plus commissions), the buyer still would have received about a 1.6% APY - still better than the current 1.4%.

AJ
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