I bought a secondary market CD from Fidelity since the rate was higher ( ~2% for 3-year CD ). In the transaction it shows I spent:
Principal amount: $36,000 Interest: $434 Net amount: $36,434
YTM: 1.99 % FIRST COUPON 01/23/2009 THIS IS AN UNSOLICITED TRADE RATINGS: NOT RATED FDIC INSURED
What is this "interest" amout? Is it something I get back when it matures? Is the 1.99% rate applicable to the principal or net amount?
It's the accrued interest from the last time the CD made an interest payment.
Say you have a CD that makes an interest payment every six months. You buy it four months after the last payment (so two months before the next one). You'll get a payment of six months of interest even though you only owned it for two months and the seller gets nothing even though he owned it for four months. So when you buy you have to cough up four months of interest to him to even things up.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
The "interest" is the amount of interest the previous owner earned between the last coupon date and the time he sold the bond. You paid that to the previous owner. On the next coupon date, you will get interest for the total time between the two coupon dates. The net effect is that you earn interest at 1.99% on the principal amount from the date you bought the CD until the next coupon date, and then on to maturity.
Dave
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