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.


  • 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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