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.
Related Terms and Definitions
- 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
- Investopedia: Brokered CD
- FDIC: Understanding Your Insured Funds
- SEC: Certificate of Deposit (CD) Resources
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
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