MARKET-LINKED CD
A Market-Linked CD or ‘MLCD’ is a FDIC-insured certificate of deposit (CD) which allows investors the potential to participate in market gains while protecting their principal investment. Upside returns are linked to the performance of an underlying asset(s), such as an equity index, stock, currency, commodity, or Exchange Traded Fund (ETF).
It is important to highlight MLCDs are intended to be held to maturity and only guarantee full return of principal at maturity. If an investor sells or redeems their investment prior to maturity, they may receive a return less than their original investment.
Market-Linked CDs are considered complex investments and may not be suitable for all investors.
Market-Linked CDs
from world leading financial institutions
Type of Accounts
Individual, Joint, Trust, IRA, SEP-IRA, SIMPLE-IRA, Corporate
Key Features
- Minimum investment is $25,000
- Terms generally range from 1 to 7 years
- FDIC-insured
A MLCD represents a bank deposit obligation and amounts of principal and any accrued interest are FDIC-insured up to $250,000 per depositor, if held to maturity. FDIC deposit insurance coverage limits are based on the total of all deposits an account holder (or holders) has at each FDIC-insured bank. Additional information, including applicable limits, is on the FDIC public website at www.fdic.gov.
100% principal protection
When purchased at par and held to maturity, the investor will generally receive their full principal investment, even if the performance of the underlying asset is negative, subject to the creditworthiness of the issuer. It is important to highlight principal protection is only provided where CDs are held to maturity and not where CDs are sold or redeemed prior to maturity.
Upside market participation
Returns are tied to the performance of the underlying asset. MLCDs can offer point-to-point, or 100% participation, in the positive performance of the underlying asset (sometimes more/less) and may cap returns depending on the terms of the MLCD.
Estate feature
Many MLCDs offer an estate feature. In the event of death, the estate may be entitled to receive 100% of the principal amount of the CD before maturity. The estate feature is subject to conditions and limitations established by individual issuer; the disclosure statement and applicable offering documents should be read carefully to understand these terms.
No dividends
Dividends paid by the underlying asset are not passed through to the investor.
How Market-Linked CDs may fit in portfolios
For investors who understand the risks associated with the individual structured CD, Market-Linked CDs can complement a balanced portfolio strategy while offering the potential to realize enhanced returns in comparison to traditional savings or deposit accounts.
There are a variety of MLCD structures which can allow investors the potential to:
- Capitalize on a market view (bullish, bearish, or market neutral)
- Complement an investment objective (conservative, moderate, or aggressive)
- Mitigate risk in a portfolio
- Gain exposure to a specific asset class or sector which may otherwise be difficult to access through direct investment
While MLCDs may not be suitable for all investors, they can be an attractive investment choice for those looking to preserve capital and limit downside risk, without sacrificing the ability to participate in upside market movements. Young families, conservative investors, individuals saving for college, baby boomers, and retirees are examples of those who may choose to address these objectives using MLCDs.
Tax Considerations
There are important tax considerations related to Market-Linked CDs, both during the term of the product and at maturity. For tax purposes, MLCD returns are generally considered interest income and are typically taxed at the holder’s ordinary income tax rate.
Neither AAM, nor its affiliates and employees, provide tax advice and investors should consult their tax advisor before investing in any Structured Product.
Statement Value Considerations
The statement value of a MLCD will differ from traditional investments and will most likely be lower than the original principal amount invested on day one. Statement values are an estimate of the current market value of the MLCD and are affected by a variety of factors, including performance of the underlying asset, interest rate movements, market values, and time remaining until maturity. Statement values do not reflect principal or payments which will be made at maturity.
Generally, the closer to maturity a MLCD is, the more the underlying asset performance and amounts due at maturity will be reflected in the statement value. The more time left to maturity, the more sensitive statement values may be to market fluctuations and other factors.