Many people are familiar with certificates of deposit (CDs) which are available at almost all banks and credit unions. Your principle is protected by FDIC and you receive a guaranteed rate of interest for a specified period of time, pretty simple right.
With Market Linked Certificates of Deposit or MLCDs, as you might expect, the return on your investment is linked to some type of stock, bond, or other market index or ETF (Exchange Traded Fund) portfolio. These MLCDs may be appropriate for investors seeking a higher rate of return than a traditional bank CD and who have a 4 to 7-year investment time frame. Here are a few questions you may have with answers included:
• Are Market Linked CDs FDIC insured? Yes, if held to maturity, your principal is protected up to the applicable limit of $250,000 per bank & registration. Note: if you surrender a Market Linked CD early it is possible for you to lose principal.
• How often do I receive interest or coupons? Market Linked CDs pay coupons (return on investment) quarterly, semi-annually, annually, or only at maturity depending on the product you choose.
• What happens if I die before maturity. Most Market Linked CDs have something called a death put which insures your beneficiaries do not lose any principal if you die. Note: it may take several weeks to receive the death put benefit, usually longer than a traditional bank CD.
• What kind of returns can I expect from a MLCD? Here are two examples of how a MLCD may perform:
Example 1: You invest $100,000 in a 5-year MLCD which has a min. annual coupon of 1%, and a cap (maximum return) of 6%. In the first year the market linked portfolio has a negative 8% return, in this case you receive the min. rate of 1% or $1,000 for the year. If the market linked portfolio returns 10% in the 2nd year, you receive a coupon payment of 6% or $6,000 which is the cap. Each year your return will be calculated in this manner.
Example 2: You invest $100,000 in a 4-year MLCD which has no minimum coupon. This CD promises to pay you 120% of the market linked portfolio return and there is no cap on your return. This CD pays one coupon at maturity. At maturity the market portfolio has a total return of 20%, therefore 20% X 1.2(120%) = 24%. You receive one coupon payment at maturity of $24,000. This works out to be an average of 6% per year for the 4-year term of the CD. Alternatively, if the market linked portfolio has a return of 0% or a negative return for the period you will receive no coupon payment at maturity, but you will receive back $100,000 or 100% of your original investment.
Market Linked CDs are complex products and you should consult with a financial professional and read all disclosures before you consider investing in this type of product.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. 90 W 100 N STE 6, Price, UT 84501 (435)-637-8160.
Consider market-linked CDs as part of your investment portfolio
Gary D. Meeks