|FDIC Insured Equity and Market Linked CD's
WHAT ARE THEY?
They literally are a cd (certificate of deposit), issued by some of the major or global banks. Because their principle is
guaranteed they qualify for FDIC insurance. What the are doing is offering a cd where some or all of the interest
earned is determined by the performance of a "basket" of stocks or commodities. There are a couple of other
varieties but these are the main two. Some cd's offer a small fixed rate of return (interest) plus a portion of the growth
of the basket of equities, while others offer no fixed interest rate. Make sure you at the very least read the pros and
cons at the bottom of each page before deciding if this is an appropriate investment for you.
HOW THEY WORK.
In many of the articles you find on the internet you see them saying that the cd's are linked to an index like the S&P
500. However, from the ones we help people buy, we do not find that to be the case. Most of these are linked to a
basket of 10 or 20 individual stocks. Which as far as I am concerned, I think these cd's would work better if they were
linked to an index instead. But we have to work with what we have not what we wished we had. The marketing pieces
will tell you what the stocks are, that are in the basket and they will tell you several real important pieces of
1. It will tell you if there is a minimum guaranteed interest rate. Some have them, some don't.
2. It will tell you what the CAP rate is or what the participation rate is. The CAP rate is the most you can make in a
given year (or other length of time). DO NOT BE MISLEAD by this number. It is not in anyway, shape or form telling
you what you will earn. Very seldom do these cd's ever actually pay the maximum rate..The participation rate is
usually listed as 100%, 105 %, 125% etc. But don't get too excited here, as is with most things that are connected
with Wall Street, this sounds better than what it is. If the market doubles you might think your cd would also double,
Sometimes with some cd's that may be true but with others they may be using an averaging method. We will cover
this more fully under "Understanding the Math".
3. It will tell you what the "floor rate" is. The floor rate is the maximum percentage that any one stock in the basket
can draw down the total of all the stocks put together. This is a really important, it's basically a negative cap. Why it
is so important is because one stock going down drastically can undo the good performance of several stocks. Since
the ones going up are capped at say 8%, if the floor is 30%, then that means if one stock goes down 30% it just wiped
out the maximum gain from basically 4 stocks that capped out on the high side.
4. It will tell you whether it pays interest on a yearly or more frequent basis or if it only pays all the interest at the very
UNDERSTANDING THE MATH AND TERMS.
It is amazing how many varieties there are of equity linked annuities and how they each figure out the interest that you
could be paid. As stated above most but not all pay the interest out yearly, while some only pay at the very end
Some use an averaging method and others use rounding up or down methods. Such as there is one that uses the
maximum cap in two different ways. If the stock comes out ahead at all for the year then it is credited with the Cap. In
other words if the stock is up just 1 penny it will be counted as if it were up the full cap rate (say for example 8%).
However if the stock is up 20% it will only be credited with 8%. It does work out as kind of a nice trade off.
There is another method that says if all the stocks are up, no matter how little or how much you will get a nice return
Such as, as of right now July 2013, we have one that says if all 5 stocks are up for the year you will be paid 8% Of
course the downside here is that if just one of those stocks is down for the year then no matter how well the other 4
did you are only going to get paid the minimum guaranteed rate which is currently .50% (one half of a percent)
The offerings change every month, we normally have 5 to 7 of what we consider to be the best each month. Two are
usually linked to the commodity markets and then another 3 to 5 are linked to different baskets of stocks. I could put
up some examples of the different ways of computing interest but there are lots of other sites that show that and of
course it is included in each disclosure.
The most important thing we could say here is take your time and deal with someone who can explain in detail each of
the current months offerings. Although complicated as a whole industry, if you have someone good they can make
the ones you are considering very understandable. There isn't much need to understand the ones that you wouldn't
be interested in or inappropriate for you.
MAJOR PROS AND CONS!
If held till maturity the principle is FDIC insured.
Interest is paid out yearly in most cases.
They offer a real opportunity to earn a more reasonable rate of return.
Not very liquid they really need to be held to maturity
If you cash in early you may or may not get back all of your principle (probably not FDIC only works if held to maturity)
Minimum investment is $20,000
All interest earned is interest subject to taxation as such, no capital gains tax rate here.
Don't expect to make a lot of money with Market Linked or Equity Linked CD's. There will be good years and bad
years, bad meaning you will get the minimum. Even though we have had a few good years in the markets lately these
cd's have averaged around the 2.5% to 3.5%. Now that interest rates are finally starting to climb a little these should
do a little better, but I would still expect to only average in the 3 to 4% range. So if you want a little higher average
return and a little more liquidity I would highly recommend you take a look at Fixed Indexed Annuities. They have a
better chance of averaging closer to the 4 to 6% in earnings and they are much more liquid.
|FDIC Insured Equity and Market Linked CD's
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|YOU MIGHT BE WONDERING
WHY YOU HAVE NOT HEARD OF
My guess is that unlike what
you might read on other sites
written by people who would
rather state their opinion than
actual facts. Those of us who
do sell things earn a really
small commission as
compared to the other
products that we offer. We
only earn about 25 to 30% of
what we earn when we sell the
other products. So if a stock
broker or insurance person
could earn 3 times as much
selling another product which
one do you think they are going
We here at Vejrostek Tax and
Financial believe we should tell
you about all your choices and
help you to buy the one that
works best for you.
Contact us for a