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Dear Dr. Don,
I spotted an advertisement for Zions Direct CD auction and I'm not sure how it works. The front page
shows market-clearing price/yield but when you click to the next page, it shows a much lower annual percentage
yield. Which do you end up with? Is this a safe investment? Is this for the average investor?
-- Noelle Nibble
Dear Noelle,
Zions Direct is running a modified Dutch auction for these CDs. Zions is acting as the auction facility for banks
seeking deposits, including Zions Bank. In a Dutch auction of securities, the issuer pays all winning
bidders the highest yield by accepting from all winning bidders the lowest price that allows the issuer to sell
out the entire issue.
To participate in the CD, you have to bid a yield at or below the highest yield that sells out the
issue. All winning bidders pay the same market-clearing price.
In this case, the issuer sets the coupon and term for the CD and prospective depositors bid on the
CD. CDs are FDIC-insured up to the limits of that insurance. Paying a premium (more than face value of the deposit)
for a CD does impact the insurance limit of the investment, because the premium paid is not covered by the deposit
insurance.
An investor who stays on top of
where rates are should be able to feel comfortable
bidding on these CDs. The best way to stay on
top of rates is with Bankrate's weekly CD
Interest Rate Roundup and its compare
rates function. I have the Bankrate's CD &
Investing newsletter delivered as an e-mail every
Wednesday. You
can, too.
A recent auction of a half-million dollar issue of a one-month CD had a coupon of 2.5 percent with a
market-clearing yield of 3.2 percent. I think that's your issue between the market-clearing price and the annual
percentage yield. That compares with a yield of 3.25 percent for a three-month CD using Bankrate's "compare rates"
feature. (Bankrate doesn't track one-month CDs.) Some of the CD auctions also have a "buy today" feature allowing
investors to buy the CD at a set price without waiting for auction results.
I think you can do as well by shopping
rates on Bankrate, but I don't see a problem with
a retail investor trying the auction approach
in buying CDs, as long as they stay within the
FDIC insurance limits.
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