Indexed CD

A certificate of deposit is a time deposit issued by a bank or credit union. Indexed CDs are a certificate of deposit with rates determined by changes in an underlying index, common benchmark or even the fluctuation of a foreign currency. Examples of indexed CDs, which are also called variable rate CDs, include stock market CDs, inflation-linked CDs, prime rate-linked CDs and foreign currency-linked CDs.

Banks also offer hybrid CDs that are similar to indexed CDs, but with some important differences. CDs that pay progressively higher interest rates (step-rate CDs) and CDs that give investors a limited option to increase their CD rate (bump-up CDs) are increasing in popularity. If you own a step-rate CD, you can compute your blended rate over the lifetime of the CD and compare it directly to the rate on a fixed CD. This is different than indexed CDs and bump-up CDs where you have to wait-and-see what your return will be.

Banks can be very creative in how they market indexed CDs. There are a variety of indexed CDs including CDs with rates that are tied to the S&P 500 Index, the prime rate in the United States, rates on Series EE Savings Bonds, yields on Treasury bills, the performance of the Chinese stock market index and even the annual increase in the cost of college tuition. Indexed CDs will often feature a partial participation rate on the upside potential of the benchmark, as well as capping the downside if the benchmark decreases.

 

Important Notes: All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results and there can be no assurance, and clients should not assume, that future performance will be comparable to past