Not all certificates of deposit have fixed interest rates, and not all are FDIC insured. A case in point: brokered CDs.
You may be offered a brokered CD by a stockbroker or other investment professional who serves as a deposit broker for the issuing bank. Brokered CDs may have a longer holding period than a CD you purchase directly from a bank. They also may be more complex and carry more risk. Although most brokered CDs are bank products, some may be securities—and won't be FDIC insured.
Brokered CDs differ in other ways from traditional CDs. For example, you may have to pay a fee to buy a brokered CD. The fee can be either a fixed amount or a percentage of the amount you are investing. If the fee is modest and the CD is paying a higher rate than you could find on your own, you may come out ahead. You may also have to invest a minimum amount, such as $10,000 or more.
If the CD is a bank product issued by a bank that is FDIC-insured, your account value is insured up to $250,000. To be eligible for FDIC insurance, however, you must be listed as the CD's owner. So you'll want to confirm that the CD is registered to you or held in your name by a custodian or trustee. Keep in mind that if you already have money on deposit at the issuing bank, the total value of your accounts could exceed the FDIC insurance. If the bank fails, you might be vulnerable to loss.
Unlike a traditional CD, brokered CDs can't simply be cashed in with the issuing bank. As a result, some firms that offer brokered CDs may maintain a secondary market—but these markets tend to be quite limited. If you want or need to liquidate your brokered CD before maturity, you may be subject to market risk. This means the CD may be worth less than you invested because other investors are not willing to pay full price to own it. This might happen if the interest rate for new CDs is higher than the rate on your CD.
Questions to Ask About Brokered CDs
Before you buy a brokered CD, ask:
• Is the brokered CD a bank product insured by the FDIC or a security?
• What is the name of the issuing bank?
• Is there a fee to buy the CD?
• Who is the deposit broker? Use FINRA BrokerCheck to check credentials.
• When does the CD mature?
• What happens if I want to cash in before maturity? Can I lose money?
• What interest rate does the CD pay?
• Is the rate fixed or variable? If variable, what makes it change and when?
• Can the bank call the CD? If so, when could that occur?
Learn more about CDs and other bank products.
Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA).
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