Personal Investors

Certificates of deposit (CDs)

CDs are deposit obligations issued by commercial banks to raise funds for their business activities. Investors lock in the market interest rate at the time of purchase, and the rate is usually fixed for the term of the CD. Vanguard Brokerage imposes a $10,000 minimum for CDs purchased through Vanguard Brokerage, with $1,000 increments thereafter.

Brokered CDs versus bank CDs

There are two different types of CDs: "brokered CDs" and "bank CDs." Vanguard offers "brokered CDs," while banks offer "bank CDs." A brokered CD is a type of CD issued by a bank or thrift institution to be bought in bulk by a brokerage firm and resold to brokerage customers. Here are the differences between a brokered and bank CD. 

Bank CDs:

  • Can only be held by the issuing bank.
  • Do not have CUSIP numbers.
  • Interest is compounded.
  • Interest penalties if redeemed prior to maturity.
  • May "roll over" into another CD at maturity.
  • FDIC-insured.
  • Stable market value.

Brokered CDs:

  • Offered by banks and sold through brokerage firms.
  • Have CUSIP numbers.
  • Similar to bonds.
  • Simple interest paid directly to Vanguard money market fund.
  • Traded in a secondary market.
  • Receive all accrued interest if sold prior to maturity.
  • Can be sold prior to maturity in the secondary market.
  • Does not "roll over" into another CD at maturity.
  • FDIC insured.
  • Fluctuating market value.

Additionally, CDs are subject to market/interest rate risk if sold prior to maturity. A brokered CD's value can decline due to rising interest rates, and longer maturities have higher interest rate risk. 

Offerings

Vanguard sells brokered CDs only. Individual banks may offer CDs, but they aren't brokered CDs. If the CD isn't a brokered CD, Vanguard can't purchase or hold the security. At Vanguard, brokered CDs are bought and sold through a dealer network, which has over 100 dealers nationwide.

  • Jumbo CDs are certificates with a minimum denomination of $100,000 that provide a slightly higher rate than regular CDs. Rates on any particular brokered CD at Vanguard will be the same for a $10,000 purchase as for a $100,000-or-above purchase.
  • Due to Blue Sky laws, not every state is available for all CDs. If an offering bank has not registered their CDs with a particular State's banking commission, residents of that state may not purchase that issue. The Fixed Income trading platform will only show clients what they can buy; that is, if a CD isn't available in a particular state, Vanguard won't show it for residents of that state.
  • All CDs offered by Vanguard carry a "Conditional Put–Death of Holder" feature. This is also called the "Survivor Option." This means that if a client passes away while holding the CD, his or her heirs can "put" the CD back to the bank at full face value with no penalty. Interest is paid up to the date of death.
  • Automatic reinvestment of CDs isn't offered at Vanguard. The principal amount for a maturing CD will automatically sweep to the linked money market at maturity. Clients who wish to reinvest must purchase a new CD, either online or by phone.

Insurance

All CDs offered by Vanguard Brokerage are FDIC-insured up to certain limits.

  • Up to $250,000 per account owner per institution for depository assets will be insured. Additional information can be found on the FDIC website.
  • In determining the applicable insurance limits, the FDIC aggregates accounts held at the issuer, including those held through different broker dealers or other intermediaries. 
  • If you purchase a CD at a premium on the secondary market, the amount of the premium is not insured.
  • All of the CDs offered by Vanguard Brokerage are FDIC-insured. For more information regarding FDIC coverage, please consult fdic.gov.

Interest and maturity

  • Maturities range from a few weeks to several years.
  • Most CDs with maturities of one year or less will pay interest at maturity. CDs with maturities longer than one year normally pay interest on a semiannual basis. Some CDs pay interest on a monthly basis.
  • CDs sold prior to maturity may be subject to a substantial gain or loss.
  • Interest doesn't compound at Vanguard and is calculated on a simple basis. This means that the holder of the CD will receive the percentage amount of interest each year that is stated on the CD (coupon or interest rate) multiplied by principal amount owned. Vanguard's rates are simple rates, and the interest is paid back to a linked money market. That interest will then earn interest in the linked money market account.

Liquidity

  • Vanguard Brokerage doesn't make a market in brokered CDs. If you wish to sell your CD prior to maturity, Vanguard Brokerage may be able to provide access to a secondary market maintained by another broker-dealer. Vanguard Brokerage can't provide assurance that you will be able to sell your CDs prior to their maturity. In addition, a secondary market for the CDs may be discontinued at any time without notice.

Fees

  • Vanguard Brokerage doesn't charge a commission for CDs purchased on the primary market, although it may receive a concession from the issuer. Commissions will be charged for transactions on the secondary market. Sales of existing CD positions are commission-free.

Risks

  • Lower yields. Yields on CDs tend to be lower than those of other higher-risk investments.
  • Interest rate fluctuation. Like all fixed income securities, CD prices are susceptible to fluctuations in interest rates. If interest rates rise, the price of outstanding CDs will generally decline. However, because changes in interest rates will have the most effect on longer maturities, short-term CDs are less susceptible to interest rate movements.
  • Credit risk. Because CDs are issued by banks, they are subject to credit risk. The insurance offered by the FDIC may help mitigate this risk.
  • Selling before maturity. CDs sold prior to maturity may be subject to a substantial gain or loss due to interest rate changes. In addition, the secondary market may be limited.

All brokered CDs will fluctuate in value between purchase date and maturity date. CDs may be sold on the secondary market, which may be limited, prior to maturity subject to market conditions. Any CD sold prior to maturity may be subject to a substantial gain or loss. Vanguard Brokerage does not make a market in brokered CDs. The original face amount of the purchase is not guaranteed if the position is sold prior to maturity. CDs are subject to availability. As of July 21, 2010, all CDs are federally insured up to $250,000 per depositor per bank. In determining the applicable insurance limits, the FDIC aggregates accounts held at the issuer, including those held through different broker dealers or other intermediaries. For additional details regarding coverage eligibility and insurance limits for other types of accounts, visit www.fdic.gov. Vanguard Brokerage imposes a $10,000 minimum for CDs purchased through Vanguard Brokerage. Yields are calculated as simple interest, not compounded. Brokered CDs do not need to be held to maturity, charge no penalties for redemption, and have limited liquidity in a secondary market. If a CD has a step rate, the interest rate of the CD may be higher or lower than prevailing market rates. Step rate CDs are subject to secondary market risk and often will include a call provision by the issuer that would subject the investor to reinvestment risk. The initial rate of a step rate CD cannot be used to calculate the yield to maturity. If a CD has a call provision, the issuer has sole discretion whether to call the CD. If an issuer calls a CD, there is a risk to the investor that the investor will be forced to reinvest at a less favorable interest rate. VBS makes no judgment as to the creditworthiness of the issuing institution and does not recommend or endorse CDs in any way.

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For additional information with respect to CDs, see the Certificate of Deposit Disclosure Statement. Additional information is available at www.fdic.gov.

Note on account protection: Securities in your brokerage account are held in custody by Vanguard Brokerage Services (VBS), a division of Vanguard Marketing Corporation, Member FINRA and SIPC. Account protection information