Redeem CD early for no penalty?

Discussion in 'Financial Planning' started by Homer Simpson, Feb 19, 2012.

  1. I received a letter in the mail from my TD Amertrade saying:

    "Lehman Brothers announced an optional Put period for all outstanding
    5% Certificates of Deposit" due July 1, 2013 ( CUSIP 52520KVF1 ). The
    expiration date for this offer is February 29, 2012

    Furthur in the letter it says I can redeem the CD without incurring
    any early redemption penalties. The fee to participate in the offer is
    $30. The CD is worth around $14k. Should I cash out now? I don't need
    the cash though.

    The language in the letter seems very confusing, even though I have a
    decent financial knowledge. My guess is most people who receive this
    have no idea what it is saying or what to do..
     
    Homer Simpson, Feb 19, 2012
    #1
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  2. On Feb 19, 6:44 pm, Homer Simpson <> wrote:
    > I received a letter in the mail from my TD Amertrade saying:
    >
    > "Lehman Brothers announced an optional Put period for all outstanding
    > 5% Certificates of Deposit" due July 1, 2013 ( CUSIP 52520KVF1 ). The
    > expiration date for this offer is February 29, 2012
    >
    > Furthur in the letter it says I can redeem the CD without incurring
    > any early redemption penalties. The fee to participate in the offer is
    > $30. The CD is worth around $14k. Should I cash out now? I don't need
    > the cash though.
    >
    > The language in the letter seems very confusing, even though I have a
    > decent financial knowledge. My guess is most people who receive this
    > have no idea what it is saying or what to do..


    They don't want to pay you 5% on your CD. Current rates for a 16 month
    CD are in the 1% range.

    You should say, no thank you.
     
    TheMightyAtlas, Feb 20, 2012
    #2
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  3. Homer Simpson

    Elle Guest

    On Feb 19, 4:44 pm, Homer Simpson <> wrote:
    > I received a letter in the mail from my TD Amertrade saying:
    >
    > "Lehman Brothers announced an optional Put period for all outstanding
    > 5% Certificates of Deposit" due July 1, 2013 ( CUSIP 52520KVF1 ). The
    > expiration date for this offer is February 29, 2012
    >
    > Furthur in the letter it says I can redeem the CD without incurring
    > any early redemption penalties. The fee to participate in the offer is
    > $30. The CD is worth around $14k. Should I cash out now? I don't need
    > the cash though.


    Like TheMightyAtlas indicates, this is a laughable offer. Another way
    to present the situation is that today's bid for a $14,000, 5% CD on
    the brokered market is about $14,686 (per Fidelity trading info on
    brokered CDs having a roughly 5% APY and maturing June-August of
    2013).

    Your CD comes up on a search at Fidelity for its CUSIP. Fidelity
    states it is not offering it, so I do not think the bid/ask
    information that comes up at Fidelity's site is very useful. For fun,
    try looking it up on TDAmeritrade's web site after you log in and see
    if it is trading. If so, it is trading for way more than $14,030.

    If 5% is the APY, your CD is paying you about $57 each month or a
    total of about $969 for the rest of the CD's life. Lehman Brothers is
    offering you $30.

    Lehman's being in bankruptcy may explain some of this.
     
    Elle, Feb 20, 2012
    #3
  4. On Feb 20, 11:02 am, Elle <> wrote:
    >
    > If 5% is the APY, your CD is paying you about $57 each month or a
    > total of about $969 for the rest of the CD's life. Lehman Brothers is
    > offering you $30.
    >
    > Lehman's being in bankruptcy may explain some of this.


    The situation is a little more complex since the CD I bought is from
    the secondary market. I paid $15k for it a year and half ago. Now it
    is worth $14k. I keep getting timely dividends from it. I am afraid if
    I hold on to it, it's value may decline even more? It's really
    confusing what I bought.
     
    Homer Simpson, Feb 20, 2012
    #4
  5. Who is the CD issuer and is it FDIC insured? If so, and you
    won't need the principal until maturity then I agree with the
    others -- doesn't make sense to turn it in.

    If *Lehman* is the issuer (esp. if it's not FDIC-backed)
    then the answer could be totally different...

    --
    Rich Carreiro
     
    Rich Carreiro, Feb 20, 2012
    #5
  6. Homer Simpson

    Elle Guest

    On Feb 20, 10:20 am, Homer Simpson
    > The situation is a little more complex since the CD I bought is from
    > the secondary market. I paid $15k for it a year and half ago. Now it
    > is worth $14k. I keep getting timely dividends from it. I am afraid if
    > I hold on to it, it's value may decline even more? It's really
    > confusing what I bought.


    My previous comments mostly do not apply now. How much is the monthly
    interest (which you call dividend)? Using the monthly interest, one
    can deduce about how much you will get back on July 1, 2013 when the
    CD matures. Then I can comment further.
     
    Elle, Feb 20, 2012
    #6
  7. On Feb 20, 12:25 pm, Elle <> wrote:

    > My previous comments mostly do not apply now. How much is the monthly
    > interest (which you call dividend)? Using the monthly interest, one
    > can deduce about how much you will get back on July 1, 2013 when the
    > CD matures. Then I can comment further.


    Here is what I bought a year and half ago for . Now its market value
    is 13,600. I paid 14,200 when I bought it. It pays interest of around
    $400 twice a year. The problem is the statement is so confusing that I
    can not make figure out if I am making or losing money on it. Though I
    get interest, the market value seems to always go down some..

    LEHMAN COML BK UTAH

    CUSIP:

    52520KVF1
    5.000% 07/01/2013

    Non Callable

    Brokered CDs sold in the secondary market are subject to market
    conditions and if sold prior to maturity may return less than your
    original investment. In the event a CD purchase is made in the
    secondary market at a premium price over par (100) the premium is not
    FDIC insured.

    Coupon & Yield

    Coupon

    5.000

    Pay Months

    Jun,Dec

    Current Yield

    4.713


    Frequency

    Semi-Annual

    First Coupon

    12-30-2008
     
    Homer Simpson, Feb 20, 2012
    #7
  8. Homer Simpson

    Dave Dodson Guest

    On Feb 19, 7:31 pm, TheMightyAtlas <> wrote:
    > On Feb 19, 6:44 pm, Homer Simpson <> wrote:
    > > "Lehman Brothers announced an optional Put period for all outstanding
    > > 5% Certificates of Deposit" due July 1, 2013 ( CUSIP 52520KVF1 ).


    > They don't want to pay you 5% on your CD. Current rates for a 16 month
    > CD are in the 1% range.


    Not only that, but they want to charge you $30 for the privilege of
    putting them off the hook for the 5% interest. Very generous, not!

    Dave
     
    Dave Dodson, Feb 20, 2012
    #8
  9. Homer Simpson <> writes:

    > Here is what I bought a year and half ago for . Now its market value
    > is 13,600. I paid 14,200 when I bought it. It pays interest of around
    > $400 twice a year. The problem is the statement is so confusing that I
    > can not make figure out if I am making or losing money on it. Though I
    > get interest, the market value seems to always go down some..
    >
    > LEHMAN COML BK UTAH


    According to FDIC.gov, a notice as of Feb 16th, 2012 says "Lehman
    Brothers Commercial Bank is no longer doing business as an
    FDIC-insured institution."

    FDIC.gov also says that on Dec 30, 2011 the institution "Closed
    voluntarily and liquidated its assets."

    Now, since your CD (a) still exists, and (b) isn't trading near zero,
    presumably it's been taken over by another bank. You may wish to find
    out which one and make sure it is FDIC-insuranced.

    Now, as to your question...

    A tradable CD acts just like a bond. Its value on any given day will
    go up and down with market interest rates. And it can be bought and
    sold for more or less than its maturity value.

    So, what is the actual maturity value of the CD? That can be part of
    why it's been losing value. If you paid $14,200 for $13,000 of
    maturity value (which may well have been possible, given it has a 5%
    coupon in a very low-yield environment), the price will inexorably
    inch down to $13,000 because that's all that'll be paid out at
    maturity.

    --
    Rich Carreiro
     
    Rich Carreiro, Feb 20, 2012
    #9
  10. Homer Simpson

    Elle Guest

    On Feb 20, 11:49 am, Homer Simpson <> wrote:
    > Here is what I bought a year and half ago for . Now its market value
    > is 13,600. I paid 14,200 when I bought it. It pays interest of around
    > $400 twice a year.


    This information is not making logical sense to me. Here is my best
    guess:

    The 5% coupon rate and $400 interest paid twice a year suggest this CD
    was worth $16,000 when issued new in July, 2008. (Certificates of
    deposit typically are sold in $1,000 increments, hence my guess is
    rounded to the nearest $1000.) So one way or another and absent any
    action on your part, supposedly at some currently unknown date in the
    future either this CD will mature and pay you the $16,000 principal,
    or the FDIC will redeem $16,000 to you.

    Indications are that this bank is now known as Woodlands Bank (located
    in Utah) and that it may be or is in the middle of Lehman's bankruptcy
    proceedings. This suggests that this CD may be acquired by another
    bank (if it has not already), with you still owning the CD. The new
    bank by law may adjust the terms (maturity and interest rate) of your
    CD. You are supposed to get the option to cash out early if you do not
    like the new terms.

    In the alternative, if the bank holding your CD fails, then because it
    is a brokered CD, it will take longer for FDIC to pay back the
    original, new issue principal.

    Call whoever is holding this CD on your behalf and find out how much
    money you get if you pay the $30 and redeem the CD. Don't trust
    TDAmeritrade to get this right. Find out what bank is actually holding
    this CD for you and call it.

    If I am correct and you will get some $16,000 upon redemption, then I
    would be inclined to redeem it. I would not want this $16k of money
    tied up for, say, ten years at 1% interest, under the new terms a
    different bank would set, no doubt with a very high redemption
    penalty.

    But what bothers me is that the market price is so low, especially
    given what you posted about this offer (pay $30 and redeem the CD
    etc.) is surely public information factored into the market price of
    the CD.

    Call whoever is holding this CD on your behalf and find out how much
    money you get if you pay the $30 and redeem the CD. Don't trust
    TDAmeritrade to get this right.* Find out what bank is actually
    holding this CD for you and call it. Shake the contact info out of
    TDAmeritrade and/or Lehmans (now Barclays). Don't panic. The law is on
    your side here. Hang in there and get the info.


    *Had really bad communications with TD a few years ago about a CD's
    terms and personally won't trust their people farther than I can throw
    them for some years more.
     
    Elle, Feb 20, 2012
    #10
  11. Homer Simpson

    Don Guest

    On Feb 20, 11:11 am, Dave Dodson <> wrote:

    > Not only that, but they want to charge you $30 for the privilege of
    > putting them off the hook for the 5% interest. Very generous, not!


    Complex and intricate indeed are many of the details of stock and bond
    buying and selling. Although cloaked in professionalism, those
    transactions nevertheless display, from time to time, the same
    deviousness and deception found in the sales of used cars, patent
    medicines, insurance policies, and vacation timeshares. Caveat emptor.
     
    Don, Feb 20, 2012
    #11
  12. Homer Simpson

    Pico Rico Guest

    "Dave Dodson" <> wrote in message
    news:...
    > On Feb 19, 7:31 pm, TheMightyAtlas <> wrote:
    >> On Feb 19, 6:44 pm, Homer Simpson <> wrote:
    >> > "Lehman Brothers announced an optional Put period for all outstanding
    >> > 5% Certificates of Deposit" due July 1, 2013 ( CUSIP 52520KVF1 ).

    >
    >> They don't want to pay you 5% on your CD. Current rates for a 16 month
    >> CD are in the 1% range.

    >
    > Not only that, but they want to charge you $30 for the privilege of
    > putting them off the hook for the 5% interest. Very generous, not!



    that is likely a brokerage fee, but one that L.B. should have offered to
    absorb.
     
    Pico Rico, Feb 21, 2012
    #12
  13. Homer Simpson

    Pico Rico Guest

    "Homer Simpson" <> wrote in message
    news:...
    > On Feb 20, 12:25 pm, Elle <> wrote:
    >
    >> My previous comments mostly do not apply now. How much is the monthly
    >> interest (which you call dividend)? Using the monthly interest, one
    >> can deduce about how much you will get back on July 1, 2013 when the
    >> CD matures. Then I can comment further.

    >
    > Here is what I bought a year and half ago for . Now its market value
    > is 13,600. I paid 14,200 when I bought it. It pays interest of around
    > $400 twice a year. The problem is the statement is so confusing that I
    > can not make figure out if I am making or losing money on it. Though I
    > get interest, the market value seems to always go down some..
    >
    > LEHMAN COML BK UTAH
    >
    > CUSIP:
    >
    > 52520KVF1
    > 5.000% 07/01/2013
    >
    > Non Callable
    >
    > Brokered CDs sold in the secondary market are subject to market
    > conditions and if sold prior to maturity may return less than your
    > original investment. In the event a CD purchase is made in the
    > secondary market at a premium price over par (100) the premium is not
    > FDIC insured.
    >
    > Coupon & Yield
    >
    > Coupon
    >
    > 5.000
    >
    > Pay Months
    >
    > Jun,Dec
    >
    > Current Yield
    >
    > 4.713
    >
    >
    > Frequency
    >
    > Semi-Annual
    >
    > First Coupon
    >
    > 12-30-2008
    >


    you have no record of the principal value of the CD you bought?
     
    Pico Rico, Feb 21, 2012
    #13
  14. Homer Simpson

    Elle Guest

    On Feb 20, 1:40 pm, Rich Carreiro <> wrote:
    > So, what is the actual maturity value of the CD?
    > That can be part of why it's been losing value.
    > If you paid $14,200 for $13,000 of maturity value
    > (which may well have been possible, given it
    > has a 5% coupon in a very low-yield
    > environment),


    Not sure what happened to the OP. But assuming the OP paid $14,200,
    then I concur with Rich's estimate that the maturity value is likely
    $13,000. The OP said he bought this in mid-2010, with three years to
    maturity. Interest rates nationwide were between about 2% and 3% at
    the time for a three-year CD. The math and the fact that CDs tend to
    be sold in $1,000 increments point to a $13k maturity value. Interest
    would be about $650 total per year (about $325 paid twice a year).

    There is no question to me that the CD under its current interest rate
    and maturity will remain FDIC insured. What to do? It sounds like the
    OP received three interest payments to date totaling about $975. The
    OP takes a loss of about $200 if he redeems the CD now, per the offer,
    for tax purposes only, really. If he waits until June 30, 2012 when
    the next interest payment occurs, he's a little ahead. ('Being ahead
    of where one started' serves only a psychological purpose. One should
    only care about expected future performance when trading any
    security.) But who knows? Maybe the CD's terms will stay intact until
    maturity on July 1, 2013.

    I would hold onto the CD. Worst case, the bank that takes over sends a
    letter saying it is adjusting the terms, and the CD owner has X days
    either to redeem or agree to the new terms, I believe at no charge for
    redemption or conversion to the new terms.

    Like Rich says, the trading value should lower to the maturity value
    (which again, sounds like it is $13k) in the coming months. The OP
    says he does not need the money, so he should not sweat the trading
    value. The OP should wait for the maturity value to land in his lap,
    one way or the other.
     
    Elle, Feb 24, 2012
    #14
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