Loss on brokered CD? Not exactly

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Dear Dr. Don,
Should I have invested in a six-year CD? I have lost $300 in just one month. This is a BB&T investment.
— Miffed Mary

Dear Mary,
After getting your permission, I talked with the bank. You’re invested in a brokered CD with a six-year final maturity. These CDs are negotiable securities. The value will fluctuate with changes in market interest rates. The fact that this is a brokered CD means you can sell it before maturity. If you sold it below its face value, you’d take a loss on the investment.

You didn’t really lose $300. Your CD is FDIC-insured. While its market value may fluctuate, the bank will pay the face value of the CD plus accrued interest when the CD matures. The reduction in market value just lets you know that the market has moved away from you.

Brokered CDs typically are held in denominations of $100,000-plus. It wouldn’t take much of an interest rate move for a brokered CD to see a decline of $300. On a present-value basis over six years, an interest rate increase of 0.05 percent would cause a six-year $100,000 CD to decline in price by almost $300.

That means that interest rates have moved higher. Higher interest rates bring lower prices for seasoned (outstanding) brokered CDs. You’ll see gyrations in the value of the CD over its life based on changes in the interest rate environment. You’re invested in an FDIC-insured investment that will pay its face value at maturity. Don’t sweat the price changes over the intermediate term.

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