Secondary Market CDs
Secondary market CDs are nearly identical to new issue CDs, except that they are now out of their primary issue phase and can be offered at a discount (or premium). The result is usually a pickup of yield over new issue CDs.
This is how new issue CDs come to market. A bank that wants to raise money in a specific year will issue CDs to broker-dealers for them to sell to their clients. The bank will build a commission for the broker-dealers into the CD price for this effort. For example, the bank may issue the CDs to broker-dealers for a price of $98. Under primary market rules, however, these CDs must be sold to the market for $100, meaning the broker-dealers would receive a profit of $2.
Primary market rules no longer apply for secondary market CDs, which can be sold at a price that doesn’t have a built-in commission. This results in more yield for investors. For example, a new issue 2017 CD yields 1.40 percent when purchased at $100. A 2017 secondary market CD with a 1.65 percent coupon can be purchased at $99.90, with a yield of 1.67 percent. This means an investor would gain an additional 0.27 percent of yield from the secondary market CD for the same credit quality and duration as the new issue CD. In most maturities, the yield pickup over primary market CDs ranges from 0.10 to 0.35 percent.
Note that supply is limited and the competition is great for secondary market CDs, especially during a prolonged period of low interest rates. However, regardless of market conditions, it is important to speak with your advisor when considering changes to the fixed
income portion of your portfolio.
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