What is a Brokered CD?

Conventionally a certificate of deposit is bought from a bank. A brokered CD is a type of traditional CD which is bought from a stock broker. It is FDIC insured upto a sum of 100,000$.Hence it carries with it a low risk rate. A brokered CD can also be sold on a secondary market. It can be liquidated prior to its maturation.

Variations of a brokered CD

Callable CD: It is a type of CD where the bank has the option of calling a CD prior to its maturation. This decision is left to the discretion the bank based on the trends of the stock market. If there is a drop in the rates of interest the bank would be running in loss by continuing with the CD and thus can call the CD. The call can be made only after the completion of the first call date. Since the risk factor is shifted onto the investor he is offered a high rate of interest. The investor cannot liquidate the CD without incurring a penalty fee or by the deduction of a percentage of the interest.

Step-up CD: The coupon rates offered in a step- up CD can increase during the duration of the CD.  The rate of interest may be lesser compared to other CD’s but a cumulative increase in coupon rates before maturation would subsequently prove more valuable than other CD’s that offer higher rates of interest. The bank has a call option on this form of CD. If the CD is not called it steps up to the next level. The step up may be greater or lesser as compared to the then prevalent market rates.

Floating CD: The coupon rates of a floating CD can be adjusted based on the predefined percentage of the reference rates such as consumer price index. The reference date determines the rate of return. The returns at maturity are not calculated based on the initial rate.

Features

You can choose to invest for any duration ranging from three months to twenty years. The rates of interest are consistent throughout the tenure of the CD. Simple interest is calculated on the principle amount. The return is yielded at maturity. The interest payment are made at predetermined intervals such as monthly or semiannually or at maturity based on the terms of the CD offered by a particular brokerage firm. The investor has the option of reinvestment based on his discretion at the end of maturity. Prior to maturation they can be sold on a secondary market.