The difference will be more, not less. That extra $700 is entirely from the premium from selling the brokered CD, and you’ve already taken out the tax on that income. But you haven’t accounted for the tax on the extra .2% being earned by the brokered CD over the subsequent 5 years.
The wash comment is because earning $X is going to result in a $Y tax bill, it isn’t material how it’s spread out over the 5 years. So you figure out how much the direct CD will earn, and how much keeping the brokered CD will earn. So dollar for dollar the tax bill will be the same, and you only need to adjust for the tax on whichever one earns more (and only for the extra). If the direct CD earns $3k more, then that choice will net you $2,250 after taxes.
I do think my $700 number is accurate or $11 a month over 5 years for choosing the direct CD over the 5% brokerage CD (using the $102 price after taxes). If it was me I wouldn’t do it, but I can see why you might want to.
You get $3k selling brokered CD. But keeping the brokered CD will earn you an extra $200/year interest for 5 years.
Those are the only firm numbers involved. Beyond that, trying to adjust for taxes, compounding, etc is going to produce a slew of different answers, each equally correct (or equally incorrect).
It is an interesting opportunity because of the divergence in direct CD and brokerage rates. Maybe the spread in these rates will continue to increase so that it might be more advantageous for you if you wait.
Are CD rates expected to go up after the latest rate increase? I opened the NFCU 5% certificate with $100 recently. I’m planning opening Alliant’s 4.6% with the $100 bonus soon.
I dont know that the spread will increase. But I do expect the premium to stay to some extent. So I’m thinking in terms of unexpected liquidity needs - I can get out of the brokered CD quick and painless, and likely at a premium. Or I capture the premium now, and face a possible EWP if needing to cash out the subsequent direct CD.
Still, the current bid of 103.797 is hard to pass up.
My $1038.00 brokered CD is now earning me 4.7% APY going forward (since interest is only paid on the $1k face value). Over 5 years, it’s also going to lose ~.7% annually as the premium regresses to the maturity value. So holding the brokered CD from this point will earn me ~4.0% annually over the next 5 years.
The replacement direct CD pays 4.7%. So swapping will earn me an extra .7% annually, or $7/year for each of the 5 years. For a $100k investment, that’s a total of $3500 more. Adjusting for 25% taxes, the bottom line is an extra $2625.
Well, yeah, because the quote is the total yield to maturity, not just the simple interest calculation. It factors in the loss of the premium as well the interest earned (like I did after the part you quoted ).
Did you buy this CD in the secondary market at a premium? Or did you buy a newly issued one. I can’t follow your math.
I bought it at face value as a new issue. So it pays 4.9% on $1,000, or $49 per year in interest earnings. At a $1038 value, that $49 interest is 4.7%. And that $38 premium over face disappears at maturity, which is approx a .7% loss each year for 5 years. Which results in a ~4% APY at this premium price. It’s not perfect math, but plenty close enough.
The correct way to analyze this is using the method scanchain provided in the chart. In my example I was comparing the 5% 5-yr CD to a 4.8 APY CD, which may not be right because of the compounding issues. What you want to know is what is the future value of a CD adding the premium net of taxes to the initial face value compared to the future value of a 4.8% or 4.7% (depends on what assumptions you use for compounding) CD without the premium.
You can’t calculate this using compounding. The brokered CD doesn’t compound, so it’s value in 5 years is $1,000. So we need to compare apples to apples - what the $1038 current value earns from the brokered CD verses a direct CD. The brokered CD’s yield to maturity is 4%, and the direct CD’s yield to maturity is 4.7%.
Do it your way, and the brokered CD is worth $1,183.75 after 5 years ($1k maturity value plus $245 interest payments less 25% tax). The direct CD (ignoring compounding, because apples to apples) is worth $1209.78 after 5 years ($1028.50 maturity value plus $241.70 interest payments less 25% tax) if you account for the tax on the premium upfront. So for $100k, it’s a difference of $2603.
So my method using yields was within $25 for the net gained.
(And yes, a couple times I confused myself when working through this )
Is Alliant still the best 12-17 month offer now with the $100 bonus plus $100 bonus for $10K deposited from outside? As mentioned previously, $5K with the bonus works out to 6.6%, and $10K deposited with external funds also works out to 6.6%.
Added 2-4-23: I opened a certificate with just $4K. With bonus it works out to 7.1% for 12 months.
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