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.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2013, The BAM ALLIANCE

Share Button

Buckingham Strategic Wealth

Buckingham Strategic Wealth was founded in 1994 to provide a disciplined, academically based investment experience tailored to address each client’s distinct willingness, ability and need to accept market risk. Offering an advisor relationship built on personal trust and company-wide integrity, we serve as a Registered Investment Advisor offering fee-based investment management to individuals, businesses, trusts, partnerships, not-for-profit organizations and retirement plans.

Foundational Materials

Buckingham prides itself on producing a wealth of non-biased financial information on a regular basis. See these articles from our blog and from our thought leaders around the nation.

Buckingham Library

Click on the covers to learn more and order the books our national thought leaders have written in recent years.

Previous Slide
Next Slide