Buying CDs from a brokerage

Personal finance

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Today, I saw an ad on Schwab advertising and had to have a look. I’d never bought acertificate of deposit (CD) through a brokerage before, so I had to read all the fine print on how that worked. I also found an older article on the .

There were three banks offering a 5.2% coupon rate (5.3% APY) with a minimum deposit of $1000. Here was the logic I went through: the 5.3% yield was better than the rate I was getting in my , and each CD was at a separate bank: Washington Mutual, LaSalle, and Discover. Each bank’s CD would be insured up to $100K by the FDIC, another thing my MMF didn’t have, and Schwab made buying the CDs as easy as a few clicks of the mouse. No need to open a separate account at each bank, receive and keep up with different statements in the mail, contact each bank separately before a CD’s maturity, etc. And most importantly, no extra fees for the added convenience.

I’m a sucker for less administration, as long as rates are pretty comparable. I didn’t do much shopping around except to look on and , which showed that 5.3% was among the best you could get for a 3-month CD at the present time.

Here’s where I’m curious if I’m right:


From what I gather, the Fed might continue to raise rates, or they might decide to halt for a while at the next meeting. But I haven’t heard any reason why the Fed would lower rates. If the Fed continues to raise rates, then CD yields (of any maturity) should tend to increase. Doesn’t that mean that if the Fed stops raising rates that CD yields are likely to remain where they are? (Would they actually go lower for any reason?) It seemed to make more sense for me to buy a 3-month CD with a good rate that matured on October 12, 2006, right after the next , rather than purchase a longer-term CD for only slightly more (0.016% to 0.25% for holding 3 to 21 add’l months).

I haven’t followed CD rates very closely, so I don’t know if my logic was right. If you have, or see a problem with my reasoning, please let me know. It’s the only way I’ll learn :)

It’s been a long time since I bought a CD. So long, in fact, that the last time I recall doing so was in the 1980s, when my mom brought me to the bank with my passbook and we bought a fixed-rate CD with something like a 13% APY. I always loved seeing my passbook updated with a new line. It felt like I was making progress on money I never saw otherwise, because my parents always made me deposit the money I received as gifts from my grandparents into my savings account. (Bit of a pain back then for a kid, but I’m certain it benefited developing my financial discipline as an adult.)

And of course, that was back when tellers were friendly and banking was done face-to-face. Nowadays, there are all sorts of weird, wonderful, and not-so-wonderful financial instruments out there. So many choices, sometimes, that it’s hard to decide what to do.

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6 Feedbacks on "Buying CDs from a brokerage"

TJ

I bought CDs via ETrade a few months ago. Six, 6-month laddered CDS (they are my I-lost-my-job-how-do-I-pay-the-bills fund) and the most current one yields 5.46%.

If your assumption is that the fed will continue to raise rates (which seems reasonable), and given the marginal yield increase, then I’d agree buying something longer than 3 months doesn’t make sense.

One thing you didn’t mention is how important financial flexibility is to you over the next 3 months. If you might need or want to do something else with that money the MMF may be a better choice.



Using Treasury Direct to buy T-bills | Experiments in Finance

[…] One of the pitfalls of taking action as you learn is you occasionally make mistakes. This happened to me recently, after happily having bought some high-yielding CDs at Schwab and then realizing that there were better options out there now that we live in California (with its 9.3% income tax rate) and not Washington state (which has no state income tax). Once again, ignoring tax implications proves perilous. But, at least I was able to find a better place to park my cash: T-bills. […]



Here’s What I Think… - about Stocks, Investing, Energy, Computing, Our Warming Planet and the News » Using Treasury Direct to buy T-bills

[…] One of the pitfalls of taking action as you learn is you occasionally make mistakes. This happened to me recently, after happily having bought some high-yielding CDs at Schwab and then realizing that there were better options out there now that we live in California (with its 9.3% income tax rate) and not Washington state (which has no state income tax). […]



financial independence » Blog Archive » kissing frogs



financial independence » Blog Archive » buying a CD from a broker

[…] In the article Buying a CD from a Broker, the procedure is outlined and alternatives, such as money market funds are compared. Primary concerns are return, duration, safety of the investment, administrative effort and cost. The author concludes that the 3 month CD prchased throiugh Schwab at no additional charge was a reasonable way to go. […]



Schwab makes it easy to buy treasuries at auction | Experiments in Finance

[…] When I discovered that Schwab offered an easy way to purchase CDs online, I bought a few 3-month CDs through Schwab yielding 5.3-5.4%. Unfortunately, I soon realized that CDs were probably not the best investment out there for us. Why? Because as California residents, the interest earned from CDs would be subject to our state income tax rate of 9.3%, and there were other instruments out there with comparable returns that were exempt from state income tax: treasuries. […]



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