Brokered CD

Detailed Definition

A Brokered Certificate of Deposit (Brokered CD) is a certificate of deposit that is initially issued by a commercial bank or savings institution but is then purchased in large quantities by a brokerage firm. The brokerage firm subsequently resells these CDs to individual investors. Brokered CDs are characterized by several key features, including potentially higher interest rates, federal deposit insurance up to $250,000 per depositor, and the availability of a secondary market, making them more liquid than regular CDs.

Key Features:

Higher Interest Rates: Brokered CDs often offer interest rates that are up to 1% higher than those directly provided by the issuing bank.
Federal Deposit Insurance: These CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank.
Secondary Market: They benefit from a liquid secondary market provided by the brokerage firm, allowing investors to sell their CDs before maturity if needed.
No Commission: Typically, investors do not pay a direct commission when purchasing brokered CDs through a brokerage firm.

Examples

High-Yield Brokered CD: An investor purchases a brokered CD through their brokerage account that offers an interest rate 0.75% higher than a traditional CD offered by the local bank.
Liquidity Advantage: An investor needs to access funds before the CD’s maturity date. They can sell the brokered CD through the broker-provided secondary market without incurring substantial penalties.
Diversification Strategy: An investor diversifies their portfolio by holding brokered CDs issued by multiple banks, each insured up to $250,000 by the FDIC.

Frequently Asked Questions (FAQs)

What is the main advantage of a brokered CD over a traditional CD?

The main advantage is the potential for higher interest rates and the availability of a more liquid secondary market.

Are brokered CDs safe?

Yes, brokered CDs are insured by the FDIC up to $250,000 per depositor, per institution, providing a high level of safety for the investment principal.

Can I sell a brokered CD before it matures?

Yes, brokered CDs can be sold in a secondary market facilitated by the brokerage firm, although the sale price might be higher or lower than the original purchase price depending on interest rate movements.

Do brokered CDs have any fees?

While there are typically no direct commissions paid when buying brokered CDs, some brokerage firms might include fees in the yield spread.

How are the interest payments made on brokered CDs?

Interest payments are usually made periodically (e.g., monthly, semi-annually) directly into the investor’s brokerage account.

Certificate of Deposit (CD): A savings product offered by banks entailing a fixed interest rate and a fixed date of withdrawal.
Secondary Market: A marketplace where investors can buy and sell securities they already own.
Federal Deposit Insurance Corporation (FDIC): A U.S. government entity that insures deposits at banks and thrift institutions.
Thrift Institution: A type of financial institution focusing on taking deposits and originating home mortgages.

Online References

Suggested Books for Further Studies

“All About Investing in Certificates of Deposit: A Guide to High-Yield CDs” by Max Rothschild
“The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly” by Larry E. Swedroe and Jared Kizer
“Personal Finance For Dummies” by Eric Tyson

Fundamentals of Brokered CD: Finance Basics Quiz

### Do brokered CDs typically offer higher interest rates compared to traditional CDs from the issuing bank? - [x] Yes, brokered CDs often offer interest rates up to 1% higher. - [ ] No, they offer the same or lower interest rates. - [ ] They offer a fixed rate regardless of the market. - [ ] They do not involve interest rates at all. > **Explanation:** Brokered CDs often provide higher interest rates compared to those available directly from banks due to bulk purchasing and competitive reselling by brokerage firms. ### Which entity insures brokered CDs to protect depositors' funds? - [ ] The Securities and Exchange Commission (SEC) - [ ] The National Credit Union Administration (NCUA) - [x] The Federal Deposit Insurance Corporation (FDIC) - [ ] The Financial Industry Regulatory Authority (FINRA) > **Explanation:** The Federal Deposit Insurance Corporation (FDIC) insures brokered CDs, providing coverage up to $250,000 per depositor, per financial institution. ### Are there usually any direct commissions when purchasing brokered CDs through a brokerage? - [ ] Yes, a direct commission is always charged. - [ ] Sometimes, it depends on the brokerage. - [x] Typically no, but the yield spread might include fees. - [ ] Yes, but it’s refunded at maturity. > **Explanation:** Generally, there are no direct commissions when purchasing brokered CDs, though the yield spread might include embedded fees. ### What is the primary market where brokered CDs can be sold before maturity? - [ ] The primary market - [x] The secondary market - [ ] The government securities market - [ ] There is no such market > **Explanation:** Brokered CDs can be sold before maturity on the secondary market facilitated by the brokerage firm, providing liquidity before the CD's maturity date. ### What is one risk of selling a brokered CD before maturity? - [ ] The interest rate might drop. - [x] The sale price may be lower than the purchase price due to interest rate changes. - [ ] There is no risk, it’s guaranteed. - [ ] FDIC insurance is lost. > **Explanation:** If interest rates have risen since the brokered CD was purchased, the market value of the CD may be less than the principal amount, leading to a potential loss if sold before maturity. ### How are interest payments typically handled for brokered CDs? - [ ] They are accrued and added to the principal at maturity. - [ ] They are manually paid out by the bank. - [ ] They are directly deducted from the principal. - [x] They are periodically paid into the investor's brokerage account. > **Explanation:** Interest payments from brokered CDs are usually credited periodically (monthly, quarterly, semi-annually, or annually) to the investor’s brokerage account. ### Are brokered CDs more or less liquid compared to traditional bank CDs? - [ ] Less liquid because they can't be sold. - [x] More liquid due to the availability of a secondary market. - [ ] Equally liquid under all circumstances. - [ ] Liquidity depends on the bank's policies only. > **Explanation:** Brokered CDs are more liquid than traditional bank CDs because they can be sold in the secondary market provided by the brokerage firm. ### What happens to the FDIC insurance if multiple brokered CDs are purchased from different banks? - [ ] Insurance is capped once the total exceeds $250,000. - [ ] Only one CD will be insured. - [x] Each CD is insured up to $250,000 per bank. - [ ] Insurance is determined by the issuing brokerage firm. > **Explanation:** Each brokered CD is insured up to $250,000 per depositor, per bank, so holding multiple CDs from different banks can increase the total insurance coverage. ### Which feature makes brokered CDs appealing to diversifiers? - [ ] Lack of insurance. - [ ] High management fees. - [ ] Fixed interest rates. - [x] Ability to spread FDIC coverage across multiple banks. > **Explanation:** The ability to purchase brokered CDs from multiple banks, each with its own $250,000 FDIC insurance limit, makes these instruments attractive for investors seeking to diversify and mitigate risk. ### Can you withdraw funds from a brokered CD before maturity without selling it? - [ ] Yes, but with no penalty. - [ ] No, it's impossible. - [ ] Yes, but only under strict exceptions. - [x] No, typically funds can only be accessed by selling the CD on the secondary market. > **Explanation:** Unlike some traditional CDs that may offer withdrawal options with penalties, brokered CDs generally require the investor to sell them in the secondary market for early access to funds.

Thank you for exploring the intricacies of Brokered CDs through our in-depth definition and our engaging quiz challenges. Keep advancing your knowledge in the world of finance and investments!