Amex Offering A 5-Year CD Through TD Ameritrade at 2.40%

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This issue's yield looks attractive, but it should be avoided.

TD Ameritrade is contacting all of their clients today to try and syndicate a 5 year CD paying 2.40%. This CD is covered under FDIC insurance rules to the $250,000 limit and because it is issued by Amex Centurion Bank, it is covered under a different FDIC certificate than savings accounts you may have at American Express Bank FSB. It also may offer a yield slightly higher than the best 5-year rates otherwise available. Nevertheless, these types of brokered issues should be avoided.

Longer-term CDs, such as a 5-year CD, can be attractive, even in a low rate environment, but only when they offer a reasonable termination clause. As this article explains, a 5-year CD with a 6 month early termination fee can effectively represent a way to get a decent one-year yield with an option to continue to hold the CD if interest rates do not rise in the outer years.

Brokered CDs, like this Amex issue through TD Ameritrade, do not offer this option. If interest rates rise, you are either stuck earning a below market interest rate or forced to sell the CD at a loss through TD Ameritrade.

Longer-term interest rates may rise dramatically at some point over the next 5 years. In fact, a dramatic spike may occur in the next year when the Federal Reserve begins to raise interest rates later this year. Even if you commit to trying to get out of this issue at the earliest signs of a interest rate move, you are going to take a huge loss selling through TD Ameritrade into an illiquid market (in fact, you would take a huge loss were you to try to sell this issue the day after purchasing it since the market is entirely illiquid). In an online 5-year CD with a 6 month early termination penalty - such as those offered by Synchrony Bank and Barclays Bank - you always have the option of holding the CD for 6 months and using the six months' interest to cover the penalty.

It should also be noted that most online brokers waive the early termination penalty upon the death of the holder, allowing the heirs / beneficiaries or executor to redeem the CD at par value. TD Ameritrade usually also forces brokered CDs to be sold into the market at a loss upon death, although with this offering they claim to offer a survivor’s option (when I called TD Ameritrade about this issue, their fixed income department was unable to fully explain or document the details of this option).

Compare the best 5 year CD rates.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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