Understanding details for certificate of deposit: Explain the features of this CD?

Question

Came across a "HARRIS N.A. IL" CD today (you can find the details here), and I'm strugging to understand the details. Here's what's listed:

CUSIP: DSA991209
Pay Frequency: SEMIANNUAL
Coupon: 3.250
Maturity Date: 09/29/2025
Call Protection: NO
Bond Type: CD
Interest Accrual Date: 09/29/2010
First Coupon Date: 03/29/2011
Price (Ask) 100.000000
Yield to Worst (Ask) 3.250%

I'm wondering if someone can help me with the following questions:

• What exactly is "Call Protection"? Is "NO" normal for a CD?
• Is "first coupon date" the first time it actually pays interest?
• Given that the first coupon date is in 6 months, and it's semiannual, is it fair to assume that this pays every six months?
• Given that the maturity date is 9/29/2025, this is really a 15-year CD, right?
• What does "Price (Ask)" mean? It says 100 - does that mean you buy in chunks of $100?
• What is "Yield to Worst (Ask)"? Is this the worst yield that this CD will return?

Thanks for the assistance. The final question is:

• 3.25% is the best yield I've seen from something as stable as a CD. Would it be silly, though, to lock money up in an investment like this for 15 years?

Answer 1

What exactly is "Call Protection"? Is "NO" normal for a CD?

A "callable" cd (or one without protection can be revoked before maturity by the issuer. For example, if interest rates drop they might recall the CD since they can borrow money at a lower rate. A callable CD should offer a better return in exchange for this.

Is "first coupon date" the first time it actually pays interest?

Yes.

Given that the first coupon date is in 6 months, and it's semiannual, is it fair to assume that this pays every six months?

Yes

Given that the maturity date is 9/29/2025, this is really a 15-year CD, right?

It depends. CDs can be resold on the market. So it is AT LEAST a 15 year CD. It could also be a 20 year CD originally issued in 2005.

What does "Price (Ask)" mean? It says 100 - does that mean you buy in chunks of $100?

Yes. More accurately, they are $100 per CD.

What is "Yield to Worst (Ask)"? Is this the worst yield that this CD will return?

The lowest potential yield that can be received on a bond without the issuer actually defaulting.

3.25% is the best yield I've seen from something as stable as a CD. Would it be silly, though, to lock money up in an investment like this for 15 years?

There is no way to really say without a crystal ball. If you aren't willing to accept more risk and think that interest rates will remain at these historic lows for a long while, then it is probably a good deal. If you think interest rates are due to go up substantially, then it is probably smarter to ladder your investments in shorter term CDs. In investment circles this is known as "Interest Rate Risk"

Answer 2

Investing in individual long-term fixed income instruments now is probably not going to make you much money right now unless you do intend to hold onto the thing and it's low yield for 15 years.

The yield is actually not the best out there, see these similar examples:

• US Governent Agency Bond - 4.00%, 15 year, semi-annual coupon
• Pennsylvania School District General Obligation Bond - 3.125% tax-exempt (which brings the net yield to around 5%), 15 year, semi-annual coupon

I'm a more aggressive and active investor, so I'd never consider making a 15 year commitment to a low rate like this. If you value stability and safety, and don't care about inflation protection, you may find this an attractive investment. I'm using New York municipal bond funds that I bought a few months back for the stable/safety portion of my portfolio. (I'm a NY resident, so there is a tax benefit)