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?
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
CD rates. 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
certificates of deposit, as long as they stay within the FDIC insurance limits.