DEFINITION of 'Brokered Certificate of Deposit'

A brokered certificate of deposit (CD) is a CD that an investor purchases through a brokerage firm, or from a sales representative other than a bank. Although the bank still initiates the CD, it outsources to firms that aim to locate potential investors. These types of CDs generally command a higher price as they are in a more competitive market.

BREAKING DOWN 'Brokered Certificate of Deposit'

As with all CDs, if held to maturity, the holder of a brokered CD will receive his or her full principal with interest. In general, CDs are savings certificates. While many retail banks offer CDs they are more complex than other financial services like checking and savings accounts. CDs will have a fixed maturity date and fixed interest rate. They can be issued in any denomination aside from minimum investment requirements. A holder of a CD cannot access the funds until the maturity date of the investment. CDs are insured by the FDIC up to $250,000 per individual.

Brokered Certificate of Deposit and Other Forms of CDs

In addition, a brokered certificate of deposit, additional forms of CDs exist. These include the bull CD, bear CD, and Yankee CD.

The bull CD’s interest rate correlates directly with the value of its underlying market index. When someone invests in a bull CD, she or he is guaranteed a minimum rate of return, as well as an additional specified percentage, based on the associated market index. The interest rate a holder of a bull CD receives during the life of the CD increases as the value of the market index increases.

By contrast, a bear CD’s interest rate fluctuates in inverse correlation to the value of its underlying market index. In this scenario, the interest rate paid on the CD increases only if the underlying market index decreases. Investors will select bear CDs primarily for speculating and hedging. For example, if an investor has a long position that is highly correlated to the underlying market index, she or he may choose to invest excess cash in a bear CD, which can offset losses.

Similar to a Yankee bond, a Yankee CD is one that a branch or agency of a foreign bank issues in the United States to American investors. A Yankee CD is denominated in U.S. dollars. Many foreign companies choose to raise capital from U.S. investors by issuing Yankee CDs.

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