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
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
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April 9, 2008 in Banking