While Certificates of Deposit (CDs) are popular investment vehicles, many investors do not understand that a CD is essentially a bond, usually of a short-term duration. As such, it can be sold in any market where there is a buyer, much as with any bond. However, all CDs are not the same, and there are different ways to sell the two main types.
Determine the type of CD that you own. The two main types of CDs available to investors are sold through banks or brokerage houses. A bank CD is typically sold for a short term, and pays interest upon maturity. As a result, the bank CD is generally priced at "par value," or the value you will receive at maturity, and this value tends to not fluctuate on bank statements. A broker-sold CD, on the other hand, acts more like a bond. Broker-sold CDs often have longer maturity dates, although they also are sold in the more traditional three- to six-month maturity range. Generally, a broker-sold CD will trade up in down in value like a bond, and will pay a stated interest rate, twice per year or occasionally monthly, also like a bond. While broker-sold CDs are usually transferable among firms, and can often be sold on the open market, bank CDs are usually only able to be sold at the issuing institution.
Contact your bank. If you own a bank-issued CD, usually your only option to sell the CD will be at the bank where it was purchased. Before you put in your sell order, make sure to ask what the penalty will be for selling the CD before maturity. Usually, banks charge one to three months of interest as a penalty, depending on the length until maturity of the CD. However, you will receive par value for the CD, generally what you paid for it, less this penalty. If you are comfortable with the amount of the penalty, tell your banker you wish to sell it, and have him place the proceeds in your account.
Check with a financial adviser. If you own a broker-sold CD, you may have more options available for your sale. Ask your broker to obtain a "bid," which is a price at which his bond desk, or another seller, is willing to buy your CD. Unlike with bank CDs, you will not be penalized for selling your broker-sold CD before maturity. However, you will have to accept whatever is the current market price, which may be higher or lower than your initial investment. As interest rates rise, bond and CD prices tend to fall, while when interest rates fall, bond and CD prices tend to rise. Thus, depending on the time until maturity, the interest rate your CD pays, and the current market interest rates, your CD will fluctuate in value and you may end up with a gain or a loss. If you are comfortable with the quoted bid price, instruct your adviser to go ahead with the sale, and your proceeds should be in your account within three business days.
- FASB 95 Treatment of Certificates of Deposit
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