MARKET-LINKED CDs PROTECTION AND PERFORMANCE

Market-Linked Certificates of Deposit are a unique form of bank deposit but not a new one. The first MLCD was introduced in 1987 by Chase bank. As with traditional CDs, MLCDs are principal protected and guaranteed if held to maturity and FDIC insured up to the statutory limits. Like traditional CDs, MLCDs are a time deposit with a maturity range generally of five to seven years.

Unlike traditional CDs where the bank declares a fixed interest rate, MLCDs use the performance of a specified “link” to determine the ultimate return to the depositor. The link may be a portfolio (basket) of stocks, bonds or commodities chosen by the bank. The most popular link currently is an index like the S&P 500 or a proprietary index comprised of multiple assets. The current and historical performance of the index can normally be tracked on a ticker service.


Market-Linked CDs are designed to outperform traditional CDs and they may or may not succeed. However, if held to maturity, they have a guaranteed return of principal regardless of the performance of the link. They offer some upside market potential with downside protection.

INDEXING

Indexing has come a long way since Jack Bogle introduced the first index mutual fund in 1976.

Many Market-Linked CDs are linked to cut
ting edge, state of the art proprietary indices that are multi-asset and dynamically rebalanced.

Diversification across multiple asset classes protects the index from concentration in a single market while the dynamic rebalancing allows the index to reposition its portfolio to take advantage of market trends.

HOME OWNERS ASSOCIATIONS and COMMUNITIES

Market-Linked CDs may offer a powerful solution for Homeowners Associations and Communities in regards to their long-term reserves.

An Association or Community’s long term reserves are clearly monies that should not be placed at risk, but there is more than one type of risk.

Loss of principal risk is obviously something that must be addressed and many Associations and Communities do so by allocating reserves to savings accounts and traditional CDs.

Many Association by-laws even require that reserves only be placed in FDIC insured accounts. However, with interest rates at historic lows, Associations and Communities are subjected to another form of risk: The risk of losing purchasing power.
If the return on the reserves fails to keep pace with inflation, when the time comes to spend those reserves they may fall short and result in the need for a special assessment.

The upside potential and principal protection of an FDIC insured Market-Linked Certificate of Deposit addresses both the risk of losing principal and the risk of losing purchasing power.