Certificates of Deposit (CDs)
Certificates of deposit, or CDs, are fixed income investments that generally pay a set rate of interest over a fixed time period.
Fidelity offers investors brokered CDs, which are CDs issued by banks for the customers of brokerage firms. The CDs are usually issued in large denominations and the brokerage firm divides them into smaller denominations for resale to its customers. Because the deposits are obligations of the issuing bank, and not the brokerage firm, FDIC insurance applies.
Brokered CD vs. bank CD
A brokered CD is similar to a bank CD in many ways. Both pay a set interest rate that is generally higher than a regular savings account. Both are debt obligations of an issuing bank and both repay your principal with interest if they’re held to maturity. More important, both are FDIC-insured up to $250,000 (per account owner, per issuer), a coverage limit that was made permanent in 2010.
Brokered CDs can also be purchased from multiple banks and held in a single account at Fidelity, allowing you to effectively expand your FDIC protection beyond the $250,000 limit. Even if you own brokered CDs within multiple accounts, these holdings can be consolidated into a single account at one financial institution.1 Unlike a bank CD, a brokered CD can be traded on the secondary market,2 meaning it doesn’t necessarily have to be held to maturity.3" When purchasing a brokered CD through Fidelity, you may also take advantage of our Auto Roll Program, which can help you maintain your income stream by reinvesting the CD’s maturing principal, or investing in multiple CDs of varying maturities in a laddering strategy.
Brokered CDs from Fidelity
Fidelity offers brokered CDs through two main venues—as new issue offerings and from the secondary market. Investors typically will see 50–100 new issue offerings and as many as 2,000 secondary offerings at any point in time. New issue offerings are typically sold at par and investors do not pay a trading fee to purchase them.4 Purchases (and sales) of secondary CDs incur a trading fee of $1 per CD (1 CD = $1,000 par value). 5
Brokered CDs come in a wide range of maturities—as little as 3 months and as long as 20 years. This allows you to choose between high degrees of liquidity, meaning you have the opportunity to reinvest your funds frequently, and stability, meaning you can lock in favorable interest rates for long periods of time. Like other fixed income securities, CDs with longer terms or maturities generally have higher yields. Brokered CDs also come with a variety of coupon payment frequencies. Your CD might be Callable or Call Protected, giving you the flexibility to choose a potentially higher rate now in exchange for the risk of the CD being called away from you. Alternatively you can choose Call Protection, which gives you more certainty of a rate of return over a defined period. Finally, you can also choose a CD that has a step-up coupon schedule. This coupon rate pays a fixed interest rate amount for a defined period and will then increase, at which point the CD will pay this new higher interest rate until it changes again so on through the maturity date. See the Risks tab for more information.
Brokered CDs offered by Fidelity are FDIC-insured up to $250,000 per account owner, per institution. However, there is a way to expand your coverage beyond this amount. While banks themselves do not have the ability to exceed FDIC-insurance limits, Fidelity offers many CDs from hundreds of different banks, each of which provides for FDIC protection up to current FDIC limits. By combining a number of these CDs in your Fidelity account, you’re able to expand your protection.3
Unlike bank CDs, there is generally a secondary market for brokered CDs sold prior to maturity.1 Furthermore, if a customer who owns a CD at Fidelity wishes to liquidate that position, he or she may do so at any time, subject to a $1 per CD (1 CD = $1,000 par value) trading fee.5 Most banks charge a penalty to liquidate one of their CDs. Note that while Fidelity attempts to support the secondary trading of the CDs it offers, the new issue market garners the most interest. Accordingly, investors attempting to sell CDs may experience limited liquidity in secondary markets.
Brokered CD offerings provide access to multiple banks’ CDs. In addition, because brokered CDs are securities, purchasing one requires none of the paperwork that is required when purchasing a bank CD. By consolidating a number of brokered CDs in a single brokerage account at a single financial institution, you’re reducing your paperwork, streamlining the purchase process, simplifying the process of managing multiple maturities, and potentially expanding your FDIC coverage under one account.
Because of the inherent safety and short-term nature of a CD investment, yields on CDs tend to be lower than other higher risk investments.
Interest rate fluctuation
Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Since changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements.
Since CDs are debt instruments, there is credit risk associated with their purchase, although the insurance offered by the FDIC may help mitigate this risk. Customers are responsible for evaluating both the CDs and the creditworthiness of the underlying issuing institution.
Insolvency of the issuer
In the event the issuer approaches insolvency or becomes insolvent, the CD may be placed in regulatory conservatorship, with the FDIC typically appointed as the conservator. As with any deposits of a depository institution placed in conservatorship, the CDs of the issuer for which a conservator has been appointed may be paid off prior to maturity or transferred to another depository institution. If the CDs are transferred to another institution, the new institution may offer you a choice of retaining the CD at a lower interest rate or receiving payment.
Selling before maturity
CDs sold prior to maturity are subject to a mark-down and may be subject to a substantial gain or loss due to interest rate changes and other factors. In addition, the market value of a CD in the secondary market may be influenced by a number of factors including, but not necessarily limited to, interest rates, provisions such as call or step features, and the credit rating of the issuer. The secondary market for CDs may be limited. Fidelity currently makes a market in the CDs we make available, but may not do so in the future.
The issuer of a callable CD maintains the right to redeem the security on a set date prior to maturity and pay back the CD's owner either par (full) value or a percentage of par value. The call schedule lists the precise call dates of when an issuer may choose to pay back the CDs and the price at which they will do so.
If your CD has a step-up coupon schedule, the interest rate of your CD may be higher or lower than prevailing market rates. Generally, a step-up CD pays a below-market interest rate for an initial defined period (often one year). After the expiration of that initial period, the coupon rate generally increases, and the CD will pay this interest rate until the next step, at which time it changes again, and so on through the maturity date. Holders bear the risk that the step-up coupon rate might be below future prevailing market interest rates. Because step-up CDs typically include call provisions, holders also bear the risks associated with callable bonds. In this regard, it is important to understand that if your CD is called, you will not benefit from the interest payment(s) of the later step(s). The initial rate on a step-up CD is not the yield to maturity. You receive the yield to maturity (YTM) only if you hold the CD until maturity (i.e. it is not sold or called). Please review the step-up schedule and call information found in the coupon and attribute columns of the search results page or in the CD Disclosure Document.
In the event that the original investor is deceased or permanently incapacitated, most brokered CDs carry a survivor's option feature (also known as a "death put"), which allows the estate of a deceased investor to "put back" or redeem both principal and accrued interest of that instrument without penalty. CDs that carry a survivor's option can generally be redeemed for par value when the survivor's option is exercised. To confirm that your CD has a survivor's option, click the description of your holding and, on the Bond Details page, locate the row Survivor's Option. Alternatively, if you are considering investing in a New Issue CD, locate the Attributes column and confirm the acronym SO is listed within the Attributes section. Issuers may limit the permissible early withdrawal of CDs to the FDIC insurance limits (currently $250,000 for each insurable capacity) and/or may limit the amount being put back in a particular time period. The survivor's option must be invoked by the estate prior to any account re-registration or transfer. For further information on exercising the survivor's option, or to learn more about potential survivor's option limitations of a particular CD issuer, please call Inheritor Services at (800) 544-0003.
FDIC insurance only covers the principal amount of the CD and any accrued interest. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. More generally, FDIC insurance limits apply to aggregate amounts on deposit, per account, at each covered institution. Investors should consider the extent to which other accounts, deposits or accrued interest may exceed applicable FDIC limits. For more information on the FDIC and its insurance coverage, visit www.fdic.gov.
Model CD ladders
Model CD Ladders—An easy way to make your cash work harder (PDF)
Learn about a quick and easy way to implement a CD ladder strategy for a portion of your portfolio.
Learn how to create a CD ladder (4:10)
See how a CD ladder can help you earn more than other cash investments while still affording frequent access to your money.
Build a model CD ladder
Select from one of our three models (1-year, 2-year, or 5-year) to see how you might take advantage of investing in a mix of longer-term and shorter-term CDs.
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