The Fair Market Value of Certificate of Deposit

by Steve Lander

Usually just called CDs, certificates of deposit are special types of bank accounts. While normal bank accounts allow you access to your money just about any time you want, a CD pays a higher rate of interest in exchange for your commitment to leave your money in the account for a set period of time. This makes a CD analogous to a bond in some ways. It also can turn a CD into something that can be bought and sold at a fair market value.

Bank CDs

Most CDs issued by banks are designed to be held by you and not sold. As such, they can't technically have a "fair market" value since there is almost no market for them. When you have a nonsalable CD, there's only one buyer for it: your bank. As such, the market value of the CD is what your bank will give you for it. This is equal to your balance, plus any interest you've earned, less any early withdrawal penalty. For instance, if you have a $5,000 three-year CD earning a 1 percent annual percentage yield that is subject to an early withdrawal penalty of three months' interest, its value after one year would be $5,037.50. That value comes from your $5,000 balance plus $50 in interest less the $12.50 penalty.

Brokered CDs

Some CDs can be bought through brokerage firms. They're bought and sold like bonds, which means that there is a fair market value for them. Their prices can vary based on the perception of the market. Usually, the value of a brokered CD moves in the opposite direction from interest rates. When rates go down, the value of a CD, which has a fixed interest rate, goes up, while CD values go down when rates go up since better investments may be available.

Brokered CD Yields

The fair market value of a brokered CD fluctuates based on the interest rate that an investor wants to earn for it. For instance, if a $1,000 CD pays 1.5 percent and the market is currently seeking a 1.5 percent yield, its fair market value should be right around $1,000. However, if interest rates go down to 1 percent, a CD paying 1.5 percent would be worth more than a market-rate account. In fact, paying $1,005 for that CD would give you about the same return as paying $1,000 for a 1 percent CD since, either way, you'd make about $10 at the end of the year. If interest rates go up, though, the fair market value of the CD would go down, since you'd need to pay less for it to get the same return you'd get from a newly issued CD at a higher rate.

Bank Quality

The fair market value of a brokered CD also depends on the quality of the bank that underwrites it. When you're an individual investor, bank quality almost doesn't matter, since you're backed by FDIC insurance on deposits up to $250,000. However, the financial markets place a higher fair market value on a CD issued by a large reliable bank like Bank of America, Wells Fargo or Citibank than on one issued by the Fifth Bank of Podunk. As such, if you intend to hold your CD to maturity, you might be able to get a higher yield by buying a CD from a small or weak bank at a low fair market value and holding it, knowing that the FDIC will make you whole. On the other hand, if you buy a brokered CD from a weak bank, you could end up having to sell it for a fair market value less than what you paid if you don't hold it to maturity.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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