Financial

Do You Have Money In Bank CD’s?

What do consumers like about Bank CD’s? Consumers like the fact that their money is protected and there is a guaranteed rate of return. What do consumers like least about Bank CD’s? Most investors I speak with dislike the measly rate of return.

What if you had another option in a Bank CD to get 100% principle protection, along with FDIC protection, and the possibility of 3-4 times the return of your regular CD’s? Would you be interested? We may have the right solution for you and your safe money needs.

If you need growth potential and safety of principal, Market-Linked CD’s (MLCD’s) may be a smart solution in today’s unpredictable & volatile markets.

Do you own a CD? Are you tired of the small interest rate you have been getting? What if you could get the same FDIC Principle Protection AND returns 3 to 4 times more than your current CD?

What is a Market-Linked CD (MLCD)?

A Market Linked CD is just like a traditional CD except that you cannot just walk into a bank lobby and purchase one from the bank clerk. Market Linked CD’s are available only through special intermediaries that specialize in assisting consumers wishing to purchase a Market Linked CD. Market Linked CD’s require higher deposit amounts, but just like a traditional CD, the principal invested in Market Linked CD’s, or MLCD’s, is insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable limits and protected from market volatility, as long as the MLCD’s are held to maturity.

Explore the features of a Market Linked CD today. Contact us to learn more about a Market Linked CD, and to see if it would be a good fit in your portfolio.

What Is A Market Linked CD?

What Is A Market Linked CD?

Market Linked CD’s are like traditional CD’s, but feature a more reasonable rate of return. Instead of a fixed interest rate, a Market Linked CD can be tied to a major index like the Dow Jones S&P 500. The rate of return can also be linked to commodity prices, currencies, and even benchmarks like the Consumer Price Index (CPI) to allow CD owners to invest in areas that are otherwise unfeasible under normal circumstances.

Market Linked CD’s are protected by the FDIC so they are insured like any traditional CD. On top of that, a Market Linked CD can be set up so if the benchmark (or index) falls by the maturity date, you still get your principal back. Market Linked CD’s are also known as equity-linked CD’s, market-indexed CD’s or simply Index CD’s.

Market-Linked CD’s allow risk-averse investors to dip their toes in the markets while staying under the secure umbrella of FDIC protection. Additionally, Market-Linked CD’s are ideal for buy-and-hold investors with little need for liquidity seeking to diversify their portfolios.

Advantages of Market Linked CD’s:

Market Linked CD’s offer the best of both worlds for those interested in keeping their savings safe, but still want a more reasonable rate of return. Market Linked CD’s feature the following advantages:

  • FDIC Insurance – The principal in invested in a market linked CD is insured to a maximum of $250,000 this year and up to $100,000 thereafter, just like any other savings accounts or CD’s. By properly allocating funds, CD consumers can effectively protect more then $250,000 through a variety of investment and account holdings.
  • Unlike the stock market, you are guaranteed to get your principal back as long as you don’t withdraw before the maturity date
    Keeps you from buying and selling since a CD gives you the “locked-up” effect that traditional CD’s provide (lack of liquidity can sometimes be a good thing)

Disadvantages of Market Linked CD’s:

  • Large Minimum Purchase – Market Linked CD’s require a high initial investment or deposit, typically around $100,000, but in some cases, deposits as small as $25,000 may be accepted.
  • Early Withdrawal Penalties – Even though the principal is guaranteed if you hold it to maturity, this is not the case for early withdrawals. Therefore, it might be possible to have a huge withdrawal penalty if you need the money before maturity. Typically, this is not a problem for CD investors that are used to using CD’s to hold funds. They understand the long-term nature of such deposits.
  • Tax Rates – Your returns are considered interest, so even though it might be from the performance of a stock market, it doesn’t qualify for the long term tax rate of 15%.
  • Tax Treatment – CD owners have to report returns as income every year they own this CD (if held in a taxable account). So while you might not even receive anything until maturity, you have to pay taxes on some return (the return is based on a traditional CD that the bank deems comparable).
  • Possible Upper Limit – Some MLCD’s have a cap on the high end that limits the returns, so the comparable index returning 100% doesn’t mean you will get a 100% return in your MLCD investment.
  • Dividend Reinvestment – A big chunk of market returns are actually provided by the dividends that the company pays. Investing in MLCD’s that track the index will not benefit from this.

Market Linked CD’s Work Best For:

Who could really benefit from something like this are people who are retired or will retire in the next 10 years. These people might not have the time horizon to wait for the stock market to come back, so giving up the dividends might be worth it to lower the risk of possibly another market crash before, or during, retirement.

Market Linked CD’s are also a great option for those that need to have their funds in an FDIC insured savings institution, in other words, only a bank will do as a place to keep their money. Even though an an annuity or life insurance product may be a better solution, some people just need that FDIC assurance, so a Market Linked CD is a great solution to the needs of those consumers.

If you plan to park your money in a conventional CD anyway, the market-linked CD may be a better solution given that the CD is in a tax sheltered account to avoid the unfavorable tax liabilities and you are sure that you will not need the the money before the CD matures to avoid early withdrawal penalties.

The worst-case scenario is that the market goes down and you get no benefit from market returns. The best-case scenario is that the market goes up and you get the guaranteed return plus a kicker from the market.

Smart Safe Money Tips:

Market Linked CD’s with shorter terms are great way to make money since you can take advantage of the volatility and only pocket the interests when the benchmark goes up. Look for MLCD’s that have shorter terms to increase your potential rate of return on your money.

In any investment, be wary of any claims of “guaranteed” returns, a la Bernie Madoff. When you purchase a Market Linked CD, all you are guaranteed to receive in the end is your principal back and whatever interest the bank agrees to pay if the market tanks for the entire duration of the CD.

A Market Linked CD sounds too goo to be true. Keep in mind that all other things being equal, an investor would find a MLCD to be just as risky or risk-free as opening a traditional CD at their local bank and using the interest earned to purchase options at various strike prices and at various expiration dates. The difference is that by buying a Market Linked CD from one of our top-rated, financially stable banks, you have professionals dedicated to finding the best opportunities for your CD funds to earn a more reasonable rate of return year after year.

Market Linked CD’s are a great solution for investors who:

  • want to earn a more reasonable rate of return, or higher potential return,, than a traditional CD can offer
  • want, or need, to avoid risk, but still want to participate in the markets
  • want to diversify their portfolio, but maintain FDIC protection for their money
  • want the security of having their funds in a financially stable & strong banking institution

What are Market Linked CD’s & How Do MLCD’s work?

Market Linked CD’s (MLCD’s) have been around for years, and work much like a traditional CD. Market Linked CD’s (MLCD’s) offer the same protection and benefits that a traditional CD offers but they come with a more reasonable rate of return.

How Market-Linked CDs work?

Market Linked CD’s offer the protection of invested principal along with financial market benefits. These features are what make MLCDs a new and increasingly more attractive financial product among bank CD investors and depositors.

A market-linked CD is a financial product based on one or more underlying asset classes, such as a bucket of securities or market indices. The structure of a Market Linked CD (MLCD) allows the purchaser to participate in the growth of the underlying asset class while retaining and benefiting from the characteristics of a traditional bank certificate of deposit, including protection against market decline. In other words, your principal is protected, as long as it is held to maturity, from losses while benefiting from financial market upside.

When held to maturity, a MLCD’s principal is protected with the purchaser receiving their interest payments based on the performance of the underlying asset class during the term of the CD or on the redemption date. If the CD is redeemed prior to maturity, the principal will not be protected and the purchaser may realize a loss, even if the underlying asset has appreciated.

Who should purchase Market Linked CDs?

The development of the Market Linked CD (MLCD) came from the increasing demand of clients willing to limit their upside performance in order to protect their principal investment. The primary goal of a Market Linked CD is principal protection. A secondary goal is a better rate of return.

While anyone can purchase MLCDs, purchasers are commonly looking to secure their wealth and benefit from market growth while receiving protection from possible declines. Young families, conservative investors, families saving for college, baby boomers and retirees are examples of those who may choose to address these objectives by purchasing Market Linked CDs, and may benefit from purchasing a Market Linked CD as part of their portfolio.

As an alternative investment product, MLCDs can complement an overall balanced portfolio while offering the potential to realize better returns compared to traditional savings or deposit options.

Performance of Market Linked CD’s

MLCDs have the potential to earn greater returns than traditional fixed income instruments over the same duration. This performance is generated from the assets the CD is linked to and the payoff structure used. MLCDs can be designed for growth strategies, income strategies or a combination of both, while offering the same principal protection benefits offered by traditional CD’s.

Market Linked CD’s offer Protected Growth

MLCDs provide the potential for capital appreciation based on the performance of an underlying asset or bucket of assets with complete protection of the original deposit, when held to maturity. When issued by an FDIC Insured Bank, the FDIC insures the original deposit if the issuing bank becomes insolvent. The FDIC standard maximum deposit insurance amount is $250,000 per depositor per FDIC insured institution. This protection offered by Marked Linked CD’s is what makes them a very attractive option for consumers wishing to protect their funds from loss.

Diversification

  • Asset class: MLCDs can be linked to a wide variety of underlying asset classes such as equities, commodities, currencies, market indices, fixed income, inflation and more. These asset classes can help you diversify your portfolio while limiting risk and potential loss of principal
  • Geography: Exposure can be provided to foreign and emerging markets without the additional currency risks of direct market investment.
  • Sophistication: MLCDs can be structured with various levels of complexity to accommodate specific investment needs that could be difficult to replicate by independent investors.

Why use Market Linked CD’s?

MLCDs have been developed due to demands from both investors and depositors as they searched through traditional investment and deposit product options to suit their needs for financial growth opportunity and principal protection in today’s markets. While the balance between risk and reward has always been a challenge, MLCDs provide a bridge between both. The protection of invested principal with financial market exposure is what makes MLCDs an exciting and increasingly popular product among investors and depositors alike.

Market Linked CDs combine the upside potential of investing in the financial markets with the safety of a certificate of deposit from a FDIC-insured banking institution.

Considerations When Using Market Linked CD’s:

Like all investments or deposits, clients should review all of the risks associated with that specific deposit or investment. MLCDs should be considered as a part of a balanced portfolio. The following risks may apply: performance/ market risk, liquidity risk, costs and tax treatment.

In addition, although MLCDs are FDIC insured, any purchase greater than the limits set by the FDIC will be subject to the credit risk of the issuer.

Performance/Market Risk:

The performance of MLCDs is based on the performance of the underlying asset(s) with respect to the type of payoff structure. Generally, a MLCD’s posessive performance may be less than investing directly in the same underlying asset(s). Clients run the risk of under-performing a traditional fixed income instrument if the asset(s) used to determine the performance of the MLCD devalue over the life of the CD. However, keep in mind that the under-performance comes with the benefits offered by an FDIC-insured financial product, namely principal protection. Principal protection means a consumer will not lose his money even if the investment markets fall.

Liquidity risk

Market Linked CDs do not trade on a secondary market and can only be redeemed prior to maturity if the issuer is able to unwind the CD early. Clients should purchase market linked CDs with the intent to hold the CD till maturity. In other words, As with any and all Bank CD purchases, a Market Linked CD is a long term financial vehicle. You should plan accordingly when deciding to use a traditional CD, Market-Linked CD, or any other type of CD.

Tax Treatment of a Market Linked CD?

Market linked CDs may be subject to different tax treatments that are based upon the type of structure. Clients should review the offering document in order to determine what type of tax liabilities the holder may be responsible for annually. The client typically does not have tax liabilities if purchased in a qualified account like an IRA.

Costs of a Market Linked CD?

Clients selling back their CD prior to maturity can realize some of the built in costs that were created when constructing the MLCD like hedging costs, placement fees, and breakage fees. These costs are likely to adversely affect the price at which the client can liquidate their CD prior to maturity. When purchasing a Market Linked CD, a consumer should make sure that it is in keeping with their financial goals and objectives befitting the use of a long term financial vehicle like a Bank CD, MLCD, or any other type of CD.

If you wish to take advantage of this exciting new opportunity in principal protection, please contact us to determine if an FDIC-insured Market Linked CD from a Major Bank is a a good fit within your portfolio.

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