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CD auctions may boost yields

By Claes Bell, CFA · Bankrate.com
Thursday, October 25, 2012
Posted: 10 am ET

In an era of rock-bottomĀ rates on certificates of deposit, desperate investors are trying all sorts of things to earn a little more from their savings, from shifting into riskier corporate bonds to buying sometimes fee-laden annuities.

While some might find success with those investments, you may want to try your hand at online CD auctions if you're looking to get a few points of extra yield while staying with an investment insured by the Federal Deposit Insurance Corp.

Those auctions, run by a number of different websites, can sometimes offer better CD rates than what you'll find from the average bank. The downside is those rates can come with some complications you may not have faced:

  • Limits on the size of the deposits.
  • Strange maturities.
  • No monthly interest payments. Depending on the terms of the CD, interest sometimes can be paid all at once at maturity rather than on a monthly basis.
  • Somewhat complex pricing structure.

On that last point, how the auctions are actually run can vary. On some sites, it's as easy as entering in a desired maturity and where you're located, and getting CD rates. Others can require some investing savvy to understand. One place to get the skinny on CD auctions is this story by our own Dr Don, "Check rates before trying CD auction."

But basically, part of your yield will come from the rate on the CD and part of it will be determined by how much you end up paying for the CD. If you buy the CD at a price below its principal amount, you'll earn more than the CD's rate when the CD matures. For instance, if I buy a CD that yields 0.3 percent on a principal of $1,000 for $990, I'll get the 0.3 percent, plus an extra 1 percent thanks to the $10 discount, for a total of 1.3 percent.

That's pretty complicated, especially compared to normal CDs that you can sign up for in minutes and are always bought at their face value and pay their yield out faithfully every month.

Still, there may be a payoff. In its latest survey of auction results, online auction site Zions Direct claims CD investors snagged an overall yield of 1.16 percent on one-year CDs, which is well above the national average of 0.3 percent. Of course, you can always check out Bankrate's CD offerings to find higher yields, too.

What do you think? Have you participated in a CD auction? What was it like? Did you get a good deal?

Follow me on Twitter: @ClaesBell.

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