OVERVIEW
Fixed Rate Callable CDs are FDIC insured and are purchased at FISN, a brokerage firm. FISN searches nationwide for attractive and suitable Callable CDs and offers these certificates of deposit for investment. Callable CDs offer higher rates than fixed term CDs but the bank has the right to return the funds early. FDIC insured banks and brokerage firms team-up to distribute insured CDs across the nation. FISN has access to a wide inventory of CDs from most major Wall Street firms. Investors select CDs that meet their needs for safety, yield and return of principal. The CD is held in a brokerage account.
PROCESS
Investors start by selecting suitable CD investments and then open a standard brokerage account at FISN in their name. A brokerage account can hold many CDs of any type, such as a laddered CD portfolio, without limit. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
FDIC COVERAGE
Fixed Rate Callable CDs are purchased in amounts starting at $25,000. No more than the $250,000 insurance limit per ownership category should be invested in any one bank at the same time. There is no limit on the number of banks per account and multiple accounts can be opened for other ownership categories such as IRA, joint or trust accounts. FISN understands the FDIC insurance rules and helps depositors gain the best return by maximizing coverage. FDIC coverage for retirement accounts is $250,000 per bank.
CALLABLE CD FEATURES
Callable CDs have an initial non-callable term and a callable term. Callable CDs pay interest at a fixed rate over the life of the CD. The interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the CDs may be called for the full amount of the deposit. When called, the bank returns the deposit amount to the brokerage account with full interest to date. If not called, the CD remains callable usually every 6 months. Only the issuing bank of each CD can make the call decision, not the depositor or the broker. The CD will continue to pay interest for the full, possible CD term if it is never called. Key information is the name of the bank, the first call date, subsequent call dates and the final stated maturity at the end of the possible term.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a valid government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Some banks exclude residents of certain states from the purchase of their CDs, otherwise, there are no limits and plenty of unrestricted product is available.
FEES
There are no placement fees paid by the investor. Banks pay brokers to distribute their CDs. New issue CDs are sold at par or a price of 100.0 to the investor. Par is the face amount of the CD on which interest is earned. Some CDs may require minimum purchase amounts.
The above disclosure is the standard for most types of CDs and it covers general terms about all CDs. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR CALLABLE CDS
Callable CDs present risks unique to that style of CD. Callable CDs pay a fixed interest rate until called. The bank can choose to make the call decision at any call date after the initial non-call period for any reason. Investors should be aware of the timing of each call date and the other terms of the CD. The risk is that the CD rate may be above prevailing market rates. If the rate is above the market and the CD is callable, the underlying CD becomes subject to Call Risk since the bank is motivated to replace the deposit with less costly funds. Reinvestment Risk arises when CDs are called, causing investors to relinquish a high rate and replace it with a lower, current market rate.
MARKET RISK
All investments including certificates of deposit (CDs) held in a securities account are subject to market risk. Market risk is always present but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value could rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. Certificates of deposit (CDs) are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued CDs be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including certificates of deposit (CDs) are included particularly since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in CDs after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Relative values may rise if more buyers are present that can be reached in a timely and effective fashion.
CALL RISK
Callable investments including callable CDs are subject to call risk. Depositors should clearly understand all call provisions. This risk is present even if you plan to hold CD investments until maturity. The bank can “call” or redeem a CD on certain call dates prior to maturity. The bank calls the entire issue regardless of the holder. When called, the bank returns the full deposited amount with interest up to the call date. Only the bank can exercise a call, not the account holder or the broker. Banks usually call a CD when rates have fallen and they can replace the deposit at a lower rate. The risk is that, even though you get back your full deposit, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted even though banks consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or fewer products are available. The other side of this “risk” is that rates may be higher and/or more products are available. Strategies to lessen this risk is to time investment maturities close to when you might need the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Longer term CDs capture higher returns from longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less credit worthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case. With FDIC insured CD investments these two risks are nearly non-existent. Most banks, particularly regional banks, are not rated but even if they were, it typically does not matter much because the FDIC stands behind the bank. In a default, the FDIC is still there, protecting depositors. The FDIC usually transfers deposits to a viable bank or simply returns the deposit when a bank fails. Both actions occur promptly as is required in the FDIC rules. This risk is avoided by following the FDIC rules and staying insured.
OVERVIEW
Certificates of deposit (CDs) are less liquid than trading investments such as stocks. CDs are designed to be held to maturity, rather than be bought and sold, over and over again. A CD investor can reclaim their funds by exiting a certificate of deposit through a variety of methods. Some CDs have early withdrawal rights, nearly every CD can be sold and most CDs have a payment at death feature.
EARLY WITHDRAWAL
Certificates of deposit held in brokerage accounts do not have early withdrawal rights for reasons other than death of the owner or joint owner.
CD SALE
Certificates of deposit can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market for CDs cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a CD is put up for sale. Also impacting the price is that CDs compete with other fixed income investments being offered at the same time. To start the CD sale process, the investor has to offer their CD for sale to their broker. The broker will consider whether the brokerage firm wants to hold the CD in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for the CD. The broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the CD. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most CDs held in a brokerage account can be transferred between brokerage firms. The receiving firm generally requests the delivering firm to transfer cash, securities and CDs between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not possible for certificates to be issued and sent to owners of record. Registration of ownership directly at the issuing bank, outside the brokerage community, reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Certificates of deposit generally have a feature that permits CDs to be paid off following the death of an owner. The standard privileges for refunding the CD apply if the CD is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each bank has its own program since there are no government rules or standards. If applicable, the bank usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. If the CD is held in a brokerage account the funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of withdrawal.
OVERVIEW
Floating Rate & Contingent Interest CDs are FDIC insured and are purchased at FISN, a brokerage firm. FISN searches nationwide for attractive and suitable Floating Rate & Contingent Interest CDs and offers these certificates of deposit for investment. The bank pays interest at a variable rate for Floating Rate CDs or at a fixed rate when certain conditions are met for Contingent Interest CDs. In either case, the bank computes the interest earned for each period based upon the specific terms of each CD. Some Floating Rate & Contingent Interest CDs are callable. Only the bank has the right to call a CD and return the funds early. FDIC insured banks and brokerage firms team-up to distribute insured CDs across the nation. FISN has access to a wide inventory from most major Wall Street firms. Investors select CDs that meet their needs for safety, yield and return of principal. The CD is held in a brokerage account.
PROCESS
Investors start by selecting suitable CD investments and then open a standard brokerage account in their name at the brokerage division of FISN, First Internet Securities Network. A brokerage account can hold many CDs of any type, without limit. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
FDIC COVERAGE
Floating Rate & Contingent Interest CDs are purchased in amounts starting at $25,000. No more than the $250,000 insurance limit per ownership category should be invested in any one bank at the same time. There is no limit on the number of banks per brokerage account and multiple brokerage accounts can be opened for other ownership categories such as IRA, joint or trust accounts. FISN understands the FDIC insurance rules and helps depositors gain the best return by maximizing coverage. FDIC coverage for retirement accounts is $250,000 per bank.
FLOATING RATE & CONTINGENT INTEREST CD FEATURES Floating CDs pay interest at a variable rate over the life of the CD. The interest rate is often fixed for the initial period. Thereafter, the variable rate could be fixed for each period based upon a formula or the variable rate could be re-calculated as often as every day based upon a formula. The effective rate for the period is often determined at the end of the period. Each CD has its own unique terms that establish the formula.
Interest is paid on a monthly, quarterly or semi-annual basisinto the brokerage account, where it can continue to earn interest in a money market fund account. It is possible that no interest might be earned in a period, if the formula indicates it, or the effective rate may be capped on the upside at a certain percentage. Investors are advised to study the Terms & Conditions of each offering and the Disclosure documents carefully in order to fully understand floating formulas, contingency terms and other features. Disclosures should be retained for future reference.
Floating Rate CDs can be callable, often at the end of each period, which usually is semi-annually. Key information is the bank issuer, interest rate formula including the name of the index, the source of the index and where it is available to view, frequency of the adjustment, floors or caps, call dates and the maturity date.
Contingent Interest CDs have a fixed rate of interest that is earned based upon satisfying certain conditions; the payment is contingent on these conditions. The interest rate is often fixed for an initial period. Thereafter, the conditions determine when interest is accrued and when it is not. The contingent calculation is often determined each day and interest is accrued daily until the end of the period. Each CD has its own unique terms that establish the formula.
Interest is paid on a monthly, quarterly or semi-annual basis into the brokerage account where it can continue to earn interest in a money market fund account. It is possible that no interest might be earned in a period if the formula accrues no daily interest because the conditions were never satisfied. Investors are advised to study the Terms & Conditions of each offering and the Disclosure documents carefully in order to fully understand the Contingent Interest formulas and other features. Disclosures should be retained for future reference.
Contingent Interest CDs can be callable, often at the end of each period, or semi-annually after an initial no call period. Key information is the bank issuer, contingent interest formula including the name of the index, the source of the index and where it is available to view, frequency of the adjustment, floors or caps, call dates and the maturity date.
CALLABLE CD FEATURES
Floating Rate & Contingent Interest CDs, if callable, have an initial non-callable term followed by a callable term. The interest rate is established for each Floating Rate period according to the Floating Rate terms, or, the fixed rate is earned based upon satisfying the conditions of the Contingent Interest terms, which cannot change during any period regardless of call provisions. The interest is paid into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the CDs may be called for the full amount of the deposit. When called, the bank returns the deposit amount to the brokerage account with full interest to date. If not called, the CD remains callable, usually every 6 months. Only the issuing bank of each CD can make the call decision, not the depositor or the broker. The CD will continue to pay interest for the full, possible CD term if it is never called. Key information is the name of the bank, the first call date, subsequent call dates and the final stated maturity at the end of the possible term.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a valid government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Some banks exclude residents of certain states from the purchase of their CDs, otherwise, there are no limits and plenty of unrestricted product is available.
FEES
There are no placement fees paid by the investor. Banks pay brokers to distribute their new issue CDs. New issue CDs are sold at par or a price of 100.0 to the investor. Par is the face amount of the CD on which interest is earned. Some CDs may require minimum purchase amounts.
The above disclosure is the standard for most types of CDs and it covers general terms about all CDs. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FLOATING RATE & CONTINGENT INTEREST CDs
Floating Rate & Contingent Interest CDs present unique risks related to the rate adjustment features. Floating Rate CDs will pay an initial rate of interest for a definite period and will “float" to an adjusted rate thereafter.
Floating Rate CDs have a formula based upon widely used indexes that determined the rate and the timing of any change.
Contingent Interest CDs have a fixed rate that is earned based upon satisfying certain conditions. The payment is contingent on these conditions.
The risk is that the floating rate may be above prevailing market rates or the contingent conditions are better than current offerings. If the terms are better than the current market and the CD is callable, the underlying CD becomes subject to Call Risk since the bank is motivated to replace the deposit with less costly funds. Reinvestment Risk arises when CDs are called, causing investors to relinquish a high rate or better terms and replace it with a lower current market rate or less attractive terms.
The initial rate in a floating rate CD or the fixed rate in a contingent CD is not the yield to maturity (YTM). The YTM on these CDs will depend upon when the CD is redeemed and how terms impacted actual interest payments and can only be determined after maturity.
MARKET RISK
All investments including certificates of deposit (CDs) held in a securities account are subject to market risk. Market risk is always present but is immaterial if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold.
Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value may rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. Certificates of deposit (CDs) are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but is immaterial if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall.
All purchasers in the secondary market demand the yield on previously issued CDs be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including certificates of deposit (CDs) are included, particularly since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but is immaterial if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in CDs after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold.
Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Relative values may rise if more buyers are present and can be reached in a timely and effective fashion.
CALL RISK
Callable investments including, callable CDs, are subject to call risk. Depositors should clearly understand all the call provisions of the CD. This risk is present even if you plan to hold CD investments until maturity. The bank can “call” or redeem a CD on certain call dates prior to maturity. The bank calls the entire issue regardless of the holder. When called, the bank returns the full deposited amount with interest up to the call date. Only the bank can exercise a call, not the account holder or the broker. Banks usually call a CD when rates have fallen and they can replace the deposit at a lower rate.
The risk is that, even though you get back your full deposit, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted; banks consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or fewer products are available; the other side of this “risk” is that rates may be higher and more products are available.
Strategies to lessen this risk are to time investment maturities close to when you might need back the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Longer term CDs capture higher returns offered by longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk, which is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt.
With most debt, if the issuer is less credit worthy, the debt security will fall in value. And, if the issuer cannot repay the debt at all, the investment may become worthless. The principal value will diminish in either case.
With FDIC insured CD investments these two risks are nearly non-existent. Most banks, particularly regional banks, are not rated but even if they were, it typically does not matter because the FDIC stands behind the bank. In a default, the FDIC is still there, protecting depositors. When a bank fails the FDIC usually transfers deposits to a viable bank or simply returns the deposit. Both actions occur promptly as is required in the FDIC rules. This risk is avoided by following the FDIC deposit insurance rules and staying insured.
Certificates of deposit (CDs) are less liquid than trading investments such as stocks. CDs are designed to be held to maturity rather than be bought and sold, over and over again. A CD investor can reclaim their funds by exiting a certificate of deposit through a variety of methods. Some CDs have early withdrawal rights, nearly every CD can be sold and most CDs have a payment at death feature.
EARLY WITHDRAWAL
Certificates of deposit held in brokerage accounts do not have early withdrawal rights for reasons other than death of the owner or joint owner.
CD SALE
Certificates of deposit can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market for CDs cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a CD is put up for sale. Also impacting the price is that CDs compete with other fixed income investments being offered at the same time.
To start the CD sale process, the investor has to offer their CD for sale through their broker. The broker will consider whether the brokerage firm wants to hold the CD in its own inventory for resale at a latter time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for the CD. The broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the CD. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the current market and business objectives of participating firms.
TRANSFERABILITY
Most CDs held in a brokerage account can be transferred between brokerage firms. The receiving firm generally requests the delivering firm to transfer cash, securities and CDs between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not possible for certificates to be issued and sent to owners of record. Registration of ownership directly at the issuing bank, outside the brokerage community, reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Certificates of deposit generally have a feature that permits CDs to be paid back following the death of an owner. The standard privileges for refunding the CD apply if the CD is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each bank has its own program since there are no government rules or standards.
If applicable, the bank usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. If the CD is held in a brokerage account the funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of withdrawal.
Non
Callable
CD Term
Possible
CD Term
Floating
Rate
Type
CD
Interest
Return
Minimum
Deposit
Buy
3.0 Yrs
15.0 Yrs
Leveraged Contingent Interest CD Linked to 3-Month LIBOR Rate
Interest Accrual is tied to the level of the 3-Month USD LIBOR Rate
Yr 1-2 Interest is paid quarterly in the first two years at a fixed rate of 4.50%.
Yrs 3-15 For years 3-15 contingent interest is paid for each quarterly period at an annual variable rate of 1.05 times (4.50% minus the 3-Month USD LIBOR rate). The contingent rate set for each quarter will be determined on the interest rate determination date 2 business days prior to the quarter and will accrue at a fixed rate for the entire period. There is also a floor, or guaranteed minimum rate of 1.00%. FDIC insured. There are limited death put redemption restrictions for this product.
Yr 1 Interest is paid quarterly in the first year at a fixed rate of 6.30%.
Yrs 2-15 For years 2 -15 contingent interest is paid for each quarterly period at an annual variable rate of 1.05 x (6.00% minus the 6- Month USD LIBOR rate). The contingent rate set for each quarter will be determined 2 business days prior to the quarter and will accrue at a fixed rate for each day in the quarter that the S&P 500 Index level is greater than 80% of the strike level. There is a cap of 6.30%. FDIC insured.
OVERVIEW
Step-Up Bonus Rate Callable CDs are FDIC insured and are purchased at FISN, a brokerage firm. FISN searches nationwide for attractive and suitable Step-Up CDs and offers these certificates of deposit for investment. The bank pays interest at a fixed rate for each period and then the rate steps-up to a new, higher rate of interest for the next period. Callable CDs offer higher rates than fixed rate CDs but the bank has the right to return the funds early. FDIC insured banks and brokerage firms team-up to distribute insured CDs across the nation. FISN has access to a wide inventory from most major Wall Street firms. Investors select CDs that meet their needs for safety, yield and return of principal. The CD is held in a brokerage account.
PROCESS
Investors start by selecting suitable CD investments and then open a standard brokerage account at FISN in their name. A brokerage account can hold many CDs of any type without limit. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
FDIC COVERAGE
Step-Up Bonus Rate Callable CDs are purchased in amounts starting at $25,000. No more than the $250,000 insurance limit per ownership category should be invested in any one bank at the same time. There is no limit on the number of banks per account and multiple accounts can be opened for other ownership categories such as IRA, joint or trust accounts. FISN understands the FDIC insurance rules and helps depositors gain the best return by maximizing coverage. FDIC coverage for retirement accounts is $250,000 per bank.
STEP-UP CD FEATURES
Step-Up CDs pay interest at a fixed rate for each period and then step-up to a new, higher rate of interest for the next period if not called. Interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. At each step-up point these CDs are usually callable. Key information is the interest rate and dates for each step period.
CALLABLE CD FEATURES
Callable CDs have an initial non-callable term and a callable term. The interest rate is fixed up-front for each step-up period and cannot change until the next step. The interest is paid into the brokerage account where it can continue to earn interest in a money market fund account. At the end of the non-callable period, the CDs may be called for the full amount of the deposit. When called, the bank returns the deposit amount to the brokerage account with full interest to date. If not called, the CD remains callable usually every 6 months. Only the issuing bank of each CD can make the call decision, not the depositor or the broker. The CD will continue to pay interest for the full, possible CD term if it is never called. Key information is the name of the bank, the first call date, subsequent call dates and the final stated maturity at the end of the possible term.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a valid government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Some banks exclude residents of certain states from the purchase of their CDs, otherwise, there are no limits and plenty of unrestricted product is available.
FEES
There are no placement fees paid by the investor. Banks pay brokers to distribute their new issue CDs. New issue CDs are sold at par or a price of 100.0 to the investor. Par is the face amount of the CD on which interest is earned. Some CDs may require minimum purchase amounts.
The above disclosure is the standard for most types of CDs and it covers general terms about all CDs. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR STEP-UP CDs
Step-Up CDs present risks unique to that style of CD. Step-up CDs will pay an initial rate of interest for a definite period and will “step-up” to a new, higher rate. Step-up CDs have multiple rate steps at predetermined intervals. Investors should be aware of the timing and interest rates of all steps. The risk is that the stepped-up rate may be above prevailing market rates. If the rate is above the market and the CD is callable, the underlying CD becomes subject to Call Risk since the bank is motivated to replace the deposit with less costly funds. Reinvestment Risk arises when CDs are called, causing investors to relinquish a high rate and replace it with a lower current market rate. The initial rate from the first step is not the yield to maturity (YTM). The YTM on a step-up CD is always higher and will depend upon when the CD is redeemed and how many steps are actually utilized.
MARKET RISK
All investments including certificates of deposit (CDs) held in a securities account are subject to market risk. Market risk is always present but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value may rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. Certificates of deposit (CDs) are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued CDs be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including certificates of deposit (CDs) are included particularly since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in CDs after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Relative values may rise if more buyers are present and can be reached in a timely and effective fashion.
CALL RISK
Callable investments including callable CDs are subject to call risk. Depositors should clearly understand all call provisions. This risk is present even if you plan to hold CD investments until maturity. The bank can “call” or redeem a CD on certain call dates prior to maturity. The bank calls the entire issue regardless of the holder. When called, the bank returns the full deposited amount with interest up to the call date. Only the bank can exercise a call, not the account holder or the broker. Banks usually call a CD when rates have fallen and they can replace the deposit at a lower rate. The risk is that, even though you get back your full deposit, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted even though banks consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or fewer products are available. The other side of this “risk” is that rates may be higher and more products are available. Strategies to lessen this risk are to time investment maturities close to when you might need back the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Longer term CDs capture higher returns from longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less credit worthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case. With FDIC insured CD investments these two risks are nearly non-existent. Most banks, particularly regional banks, are not rated but even if they were, it typically does not matter much because the FDIC stands behind the bank. In a default, the FDIC is still there, protecting depositors. The FDIC usually transfers deposits to a viable bank or simply returns the deposit when a bank fails. Both actions occur promptly as is required in the FDIC rules. This risk is avoided by following the FDIC rules and staying insured.
OVERVIEW
Certificates of deposit (CDs) are less liquid than trading investments such as stocks. CDs are designed to be held to maturity rather than be bought and sold, over and over again. A CD investor can reclaim their funds by exiting a certificate of deposit through a variety of methods. Some CDs have early withdrawal rights, nearly every CD can be sold and most CDs have a payment at death feature.
EARLY WITHDRAWAL
Certificates of deposit held in brokerage accounts do not have early withdrawal rights for reasons other than death of the owner or joint owner.
CD SALE
Certificates of deposit can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market for CDs cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a CD is put up for sale. Also impacting the price is that CDs compete with other fixed income investments being offered at the same time. To start the CD sale process, the investor has to offer their CD for sale to their broker. The broker will consider whether the brokerage firm wants to hold the CD in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for the CD. The broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the CD. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most CDs held in a brokerage account can be transferred between brokerage firms. The receiving firm generally requests the delivering firm to transfer cash, securities and CDs between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not possible for certificates to be issued and sent to owners of record. Registration of ownership directly at the issuing bank, outside the brokerage community, reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Certificates of deposit generally have a feature that permits CDs to be paid off following the death of an owner. The standard privileges for refunding the CD apply if the CD is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each bank has its own program since there are no government rules or standards. If applicable, the bank usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. If the CD is held in a brokerage account the funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of withdrawal.
OVERVIEW
Fixed Rate, Fixed Term CDs are FDIC insured and are purchased at FISN, a brokerage firm. FISN searches nationwide for attractive and suitable CDs with a standard fixed rate and fixed maturity date and offers these certificates of deposit for investment. FDIC insured banks and brokerage firms team-up to distribute insured CDs across the nation. FISN has access to a wide inventory from most major Wall Street firms. Investors select CDs that meet their needs for safety, yield and return of principal. The CD is held in a brokerage account.
PROCESS
Investors start by selecting suitable CD investments and then open a standard brokerage account at FISN in their name. A brokerage account can hold many CDs of any type, such as a laddered CD portfolio, without limit. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
FDIC COVERAGE
Fixed Rate, Fixed Term CDs are purchased in amounts starting at $25,000. No more than the $250,000 insurance limit per ownership category should be invested in any one bank at the same time. There is no limit on the number of banks per account and multiple accounts can be opened for other ownership categories such as IRA, joint or trust accounts. FISN understands the FDIC insurance rules and helps depositors gain the best return by maximizing coverage. FDIC coverage for retirement accounts is $250,000 per bank.
FIXED RATE, FIXED TERM CD FEATURES
This is a standard FDIC insured CD. It is held in a brokerage account and pays interest at a fixed rate over the life of the CD. The interest is paid on a semi-annual or monthly basis into the brokerage account where it can continue to earn interest in a money market fund account. There are no call provisions. The rate is fixed up-front and cannot change. The term is fixed up-front with a certain maturity date that cannot change. Key information is the name of the bank, the issue date and the maturity date.
Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a valid government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Some banks exclude residents of certain states from the purchase of their CDs, otherwise, there are no limits and plenty of unrestricted product is available.
FEES
There are no placement fees paid by the investor. Banks pay brokers to distribute their new issue CDs. New issue CDs are sold at par or a price of 100.0 to the investor. Par is the face amount of the CD on which interest is earned. Some CDs may require minimum purchase amounts.
The above disclosure is the standard for most types of CDs and it covers general terms about all CDs. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR FIXED RATE, FIXED TERM CDs
Fixed Rate, Fixed Term CDs present few unique risks. These CDs are traditional CDs established at a fixed rate for a fixed term. There are no steps or calls. Investors should be aware of the rate, the frequency of interest payments and the maturity date. The risk is that the CD rate may dip below the prevailing market rates. If the rate is below the market, the investor has lost the opportunity to earn a higher return. Since Early Withdraws are not available, the only way to get your investment back and capture a higher rate is to sell the CD at a market price which probably will generate a loss. Such a loss is comparable to an Early Withdraw Penalty but could be greater if rates have risen significantly.
MARKET RISK
All investments including certificates of deposit (CDs) held in a securities account are subject to market risk. Market risk is always present but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value may rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. Certificates of deposit (CDs) are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued CDs be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including certificates of deposit (CDs) are included particularly since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in CDs after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Relative values may rise if more buyers are present and can be reached in a timely and effective fashion.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or fewer products are available. The other side of this “risk” is that rates may be higher and/or more products are available. Strategies to lessen this risk are to time investment maturities close to when you might need the money back or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Longer term CDs capture higher returns from longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less credit worthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case. With FDIC insured CD investments these two risks are nearly non-existent. Most banks, particularly regional banks, are not rated but even if they were, it typically does not’t matter much because the FDIC stands behind the bank. In a default, the FDIC is still there, protecting depositors. The FDIC usually transfers deposits to a viable bank or simply returns the deposit when a bank fails. Both actions occur promptly as is required in the FDIC rules. This risk is avoided by following the FDIC rules and staying insured.
OVERVIEW
Certificates of deposit (CDs) are less liquid than trading investments such as stocks. CDs are designed to be held to maturity rather than be bought and sold, over and over again. A CD investor can reclaim their funds by exiting a certificate of deposit through a variety of methods. Some CDs have early withdrawal rights, nearly every CD can be sold and most CDs have a payment at death feature.
EARLY WITHDRAWAL
Certificates of deposit held in brokerage accounts do not have early withdrawal rights for reasons other than death of the owner or joint owner.
CD SALE
Certificates of deposit can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market for CDs cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a CD is put up for sale. Also impacting the price is that CDs compete with other fixed income investments being offered at the same time. To start the CD sale process, the investor has to offer their CD for sale to their broker. The broker will consider whether the brokerage firm wants to hold the CD in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for the CD. The broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the CD. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most CDs held in a brokerage account can be transferred between brokerage firms. The receiving firm generally requests the delivering firm to transfer cash, securities and CDs between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not possible for certificates to be issued and sent to owners of record. Registration of ownership directly at the issuing bank, outside the brokerage community, reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Certificates of deposit generally have a feature that permits CDs to be paid off following the death of an owner. The standard privileges for refunding the CD apply if the CD is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each bank has its own program since there are no government rules or standards. If applicable, the bank usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. If the CD is held in a brokerage account the funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of withdrawal.
OVERVIEW
Stock Market, Index & Basket Linked CDs are FDIC insured and are purchased at FISN, a brokerage firm. FISN searches nationwide for attractive and suitable CDs linked to the performance of stock market indexes and offers these certificates of deposit for investment. CD performance can also be linked to commodity and currency indexes as well. FDIC insured banks and brokerage firms team-up to distribute insured CDs across the nation. FISN has access to a wide inventory from most major Wall Street firms. Investors select CDs that they believe will capture the upside possibilities of the market while avoiding many down-side risks. The CD is held in a brokerage account.
PROCESS
Investors start by selecting suitable stock market, currency or commodity linked CD investments and then open a standard brokerage account at FISN in their name. A brokerage account can hold many CDs of any type, or linked to any index, without limit. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.
FDIC COVERAGE
Market linked CDs are purchased in amounts starting at $25,000. No more than the $250,000 insurance limit per ownership category should be invested in any one bank at the same time. Since these CDs usually pay interest at maturity, room must be left within the insurance limits to accommodate stock market interest earnings paid at maturity. There is no limit on the number of banks per account and multiple accounts can be opened for other ownership categories such as IRA, joint or trust accounts. FISN understands the FDIC insurance rules and helps depositors gain the best return by maximizing coverage. FDIC coverage for retirement accounts is $250,000 per bank.
STOCK MARKET CD FEATURES
Market linked CDs pay interest based upon the gain in a related stock market, commodity or currency index. Some CDs pay a minimum interest return regardless of the index gain. At maturity, the index return is calculated. If the gain exceeds the minimum interest, then the full gain is paid out. If the gain is less than the minimum, zero or even negative, just the minimum interest amount is paid. If there is no minimum interest stipulated on the CD, you receive just the positive index gain as interest, or you receive no interest if the index actually declined in value. The interest is paid at maturity into the brokerage account where it can continue to earn interest in a money market fund account. It is possible no interest could be earned over the full term if the index declines.
Stock Market CDs are linked to a variety of domestic and foreign equity indexes as well as commodity & currency indexes. Most commonly used are the U.S. stock indexes - S&P 500, NASDAQ 100 and the Dow Jones Industrial Average. Foreign indexes for stocks in Europe or Asia are often mixed with U.S. indexes to comprise a world basket investment. A wide variety of commodities and currencies can also be mixed in an investment basket. The index return is calculated in a variety of ways usually with some type of averaging. The index level on selected dates are averaged and compared to the initial index to figure the gain. Other structures look at the just the difference between the start date and the final date. Gains are often limited by caps or a maximum return. Each deal is unique. Key information is the name of the bank, the actual index used, the method of calculating the gain with any caps or floors and whether there is a minimum level of interest.
CALLABLE CD FEATURES
Most Stock Market CDs are not callable. Callable market linked CDs have the usual non-callable term and a callable term. The interest amount is fixed up-front for each call and cannot change. The longer the CD goes without being called the higher the interest amount. Interest is only paid when called, or at maturity, if not called. The interest amount at maturity usually looks at the just the index difference between the initial date and the final date near maturity. At the end of the non-callable period, the CDs may be called for the full amount of the deposit. If called, the bank returns the deposit amount to the brokerage account with interest to date. If not called, the CD remains callable based upon the scheduled call dates. Only the issuing bank of each CD can make the call decision, not the depositor or the broker. Key information is the first call date with its interest amount and subsequent call dates with their applicable interest amounts.
Interest can be disbursed via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards.
ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a valid government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Some banks exclude residents of certain states from the purchase of their CDs, otherwise, there are no limits and plenty of unrestricted product is available.
FEES
There are no placement fees paid by the investor. Banks pay brokers to distribute their new issue CDs. New issue CDs are sold at par or a price of 100.0 to the investor. Par is the face amount of the CD on which interest is earned. Some CDs may require minimum purchase amounts.
The above disclosure is the standard for most types of CDs and it covers general terms about all CDs. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.
UNIQUE RISKS FOR STOCK MARKET CDs
Stock Market CDs present risks unique to that style of CD. These CDs by definition are not traditional. There is often no guaranteed interest unless a minimum interest amount is paid. The return is linked to the return of a stock market or other type index. Investors should be aware of the unique terms of each CD including which index is used and how the return is calculated and whether there are any limiting factors such as averaging, floors or ceilings. The risk is that the index may not behave as well as the market or that no interest is earned. Read the disclosure statement carefully to understand all applicable risks. Some limiting factors could enhance the return compared to the market. Unlike a stock or mutual fund, the return of original investment is FDIC insured if held to maturity.
MARKET RISK
All investments including certificates of deposit (CDs) held in a securities account are subject to market risk. Market risk is always present but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value may rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as economic events, interest rate movements, transaction cost and availability of purchasers.
INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. Certificates of deposit (CDs) are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall. All purchasers in the secondary market demand the yield on previously issued CDs be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.
SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including certificates of deposit (CDs) are included particularly since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but has no effect if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in CDs after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Relative values may rise if more buyers are present and can be reached in a timely and effective fashion.
RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or fewer products are available. The other side of this “risk” is that rates may be higher and/or more products are available. Strategies to lessen this risk are to time investment maturities close to when you might need the money back or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Longer term CDs capture higher returns from longer investments. Shorter maturities keep the remainder of your funds regularly available so rate and market swings are not missed.
PRINCIPAL RISK
All investments are subject to principal risk. This risk is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt. With most debt, if the issuer is less credit worthy, the debt will fall in value. And, if the issuer cannot repay the debt at all, the investment may be near worthless. The principal value will diminish in either case. With FDIC insured CD investments these two risks are nearly non-existent. Most banks, particularly regional banks, are not rated but even if they were, it typically does not’t matter much because the FDIC stands behind the bank. In a default, the FDIC is still there, protecting depositors. The FDIC usually transfers deposits to a viable bank or simply returns the deposit when a bank fails. Both actions occur promptly as is required in the FDIC rules. This risk is avoided by following the FDIC rules and staying insured.
OVERVIEW
Certificates of deposit (CDs) are less liquid than trading investments such as stocks. CDs are designed to be held to maturity rather than be bought and sold, over and over again. A CD investor can reclaim their funds by exiting a certificate of deposit through a variety of methods. Some CDs have early withdrawal rights, nearly every CD can be sold and most CDs have a payment at death feature.
EARLY WITHDRAWAL
Certificates of deposit held in brokerage accounts do not have early withdrawal rights for reasons other than death of the owner or joint owner.
CD SALE
Certificates of deposit can be sold in the secondary market for fixed income investments. This market is an “over the counter” market which is actually conducted over the telephone. There is no mechanism such as the New York Stock Exchange where orders can be entered and a sale is guaranteed. The availability of this secondary market for CDs cannot be guaranteed. And, there may not be buyers willing to pay an acceptable price if a CD is put up for sale. Also impacting the price is that CDs compete with other fixed income investments being offered at the same time. To start the CD sale process, the investor has to offer their CD for sale to their broker. The broker will consider whether the brokerage firm wants to hold the CD in its own inventory for resale at a later time or to sell it to another brokerage firm on the “street”. The broker will offer a net price to the investor for the CD. The broker and other “middle men” will build into their prices a trading incentive to cover their cost and profit objectives. The investor can accept the price or continue to hold the CD. There is no assurance how high the “bid” price will be or that this price will be close to estimated prices shown online or printed on recent statements. Prices are simply reflections of the market and business objectives of participating firms.
TRANSFERABILITY
Most CDs held in a brokerage account can be transferred between brokerage firms. The receiving firm generally requests the delivering firm to transfer cash, securities and CDs between accounts registered in the same ownership capacity. All debits and fees need to be paid prior to a transfer. Every firm has a process including minimums, fees and forms. It is not possible for certificates to be issued and sent to owners of record. Registration of ownership directly at the issuing bank, outside the brokerage community, reduces liquidity, prolongs an ownership transfer and lengthens the time for any sale.
PAYABLE ON DEATH
Certificates of deposit generally have a feature that permits CDs to be paid off following the death of an owner. The standard privileges for refunding the CD apply if the CD is owned by a single person or by a joint account of individuals. Other ownership forms used by individuals may require investigation to determine whether they fit the circumstances necessary for payment on death. Each bank has its own program since there are no government rules or standards. If applicable, the bank usually requires a death certificate and a standard form indicating the authority of a living individual to request the payment following death for the deceased person. FISN can assist survivors or estate officials in this process. The return of funds is not immediate and can take several weeks once all the paper work is submitted. If the CD is held in a brokerage account the funds are simply returned to the brokerage account. The full amount is returned with interest up to the date of withdrawal.
Sum of the Quarterly Index Changes Plus Annual Interest
Guaranteed Interest is paid annually plus Index Interest is paid at maturity. Index Interest is based upon the sum of the 24 quarterly percentage changes, up or down, in index value times the deposit amount. Each quarter the change period is reset. The quarterly change is calculated from start of the quarter to end of the quarter in the period and any quarterly increase will be capped at 3.00% to 5.00% with no floor on the downside. In the event the sum of the quarterly percentage changes is down, no Index Interest is paid, only guaranteed annual interest is paid. FDIC insured.
Guaranteed Interest Paid Annually at 0.25% to 0.50%
Barclays Capital Growth Stock (Q-GSP) Large Cap Index Market Linked Deposit
The Q-GSP Large Cap US Gross Excess Return Index provides dynamic exposure to a basket of growth stocks selected each month. Stocks are selected for inclusion in the Index based upon their performance, historical P/E ratios and other criteria. Read the the disclosure statement for a full explanation of the Index and CD terms.
Point-to-Point Appreciation without a Cap and Guaranteed Annual Interest
Guaranteed interest is paid annually and index interest is paid at maturity based upon the increase in the index over the term from the starting index level to the final index level. The increase in the index has no cap and index interest rate will be based upon 100% of the index increase. If the index is down, no index interest is paid, only the guaranteed interest is paid. FDIC insured.
Guaranteed Interest of 0.25% to 0.50% Paid Annually
Sum of the Capped Quarter over Quarter Index Increases
Interest is paid at maturity based upon the 20 quarterly percentage changes up or down in index value. The Index Interest rate is the sum of the 20 periodic percentage changes up or down times the deposit amount. Each quarterly change is viewed from start to finish in the quarterly period and any increase will be capped at 4.0% - 5.0% with no floor on the downside. In the event the sum of the quarterly percentages is down, or up less than the minimum rate of 2.50%, only the minimum rate of 2.50% is paid at maturity. FDIC insured.
Quarterly Average Increase with No Cap on the Increases
Interest is paid at maturity based upon the increase in the average of the 28 quarterly closing levels of the equally weighted basket over the term from the starting average Basket level to the final average Basket level. There is no cap on the quarterly increases. If the average Basket level does not increase, no interest is paid. FDIC insured.
Annual Interest Payout with Auto Cap Interest on the Upside & Floor Protection on the Downside
Annual interest is paid based upon the average gain of the 10 commodity components in the equally weighted basket. Each year the gain is recomputed from the initial average value to the year-end average value and interest is paid if applicable. The gain is the average change in the basket value. If the annual change for any commodity component is positive, it automatically gets counted at the Auto Cap increase level. The Auto Cap commodity increase level is expected to be 5.5% to 7.5% per year. No interest is paid if the average is down. There is a downside Floor of negative 20% down per commodity component. FDIC insured.
Annual Interest Payout with Auto Cap Interest on the Upside & Floor Protection on the Downside
Annual interest is paid based upon the average gain of the 10 commodity index components in the equally weighted basket. Each year the gain is recomputed from the initial average value to the year-end average value and interest is paid if applicable. The gain is the average change in the basket value. If the annual change for any commodity component is positive, it automatically gets counted at the Auto Cap increase level. The Auto Cap commodity increase level is expected to be 8.5% to 10.5% per year. No interest is paid if the average is down. There is a downside Floor of negative 20% down per commodity component. FDIC insured.
Point-to-Point Appreciation with No Cap and Minimum Positive Return
Interest is paid at maturity based upon the increase relative to the US Dollar in the equally weighted currency basket from the starting level to the ending level. These currencies appreciate against the US Dollar if the exchange value of the dollar falls. There is no cap on the BRIC currencies appreciation. If the Basket value is positive, the interest rate will be the greater of the Contingent Minimum Return of 11.25% to 16.25% or the actual performance. If the basket value is down, no interest is paid. FDIC insured.
JPMorgan ETF Efficiente 5 Index Market Linked Deposit
ETF Efficiente 5 Index
Basket Components Developed Equities - 50% SPDR® S&P 500® ETF Trust, iShares® Russell 2000 Index Fund & iShares® MSCI EAFE Index Fund
Bonds - 50% iShares® Barclays 20 Year Treasury Bond Fund, iShares® iBOXX Investment Grade Corporate Bond Fund & iShares® iBOXX High Yield Corporate Bond Fund
Emerging Markets - 25% iShares® MSCI Emerging Markets Index Fund & iShares® Emerging Markets Bond Fund
Alternative Investments - 25% iShares® Dow Jones Real Estate Index Fund, iShares® S&P GSCI® Commodity-Indexed Trust & SPDR® Gold Trust
Inflation Protected Bonds and Cash - 50% iShares® Barclays TIPS Bond Fund & JPMorgan Cash Index USD 3 Month
Leveraged Point-to-Point Appreciation of Monthly Rebalanced Synthetic Portfolio without a Cap
Interest is paid at maturity based upon at least 105% of the gain realized in the ETF Efficiente 5 Index, a notional dynamic basket, from the starting Index value to the ending Index value. The JPMorgan ETF Efficiente 5 Index is a JPMorgan strategy that tracks the excess returns of 12 exchange-traded funds (ETFs) in a synthetic portfolio representing a diverse range of asset classes and geographic regions.There is no cap on the gain. The underlying index Bloomberg symbol is EEJPUS5E.
The index basket re-balances monthly a synthetic portfolio composed of the Basket Components. The monthly index basket composition is based upon the "modern portfolio theory" approach to asset allocation, which suggests how a rational investor should allocate their capital across the available universe of assets to maximize return for a given risk appetite. The basket is re-balanced monthly to get the highest return based upon current conditions.This strategy is based on the assumption that the most efficient allocation of assets is one that maximizes returns per unit of risk. The Index uses the volatility of returns of hypothetical portfolios as the measure of risk.
Investors should read the Term Sheet and Brochure carefully before investing. FDIC insured.
Leveraged Point-to-Point Appreciation of Monthly Rebalanced Synthetic Commodity Portfolio with at least 105% Participation
Interest is paid at maturity based upon at least 105% of the gain realized in the Optimax Market-Neutral Index over the term. The Index is rebalanced each month in order to maximize the estimated return for the synthetic portfolio without exceeding a given risk threshold. There is no cap on the gain. The underlying Bloomberg index symbol is CMDTOMER.
The Optimax Market-Neutral Index references the value of a synthetic portfolio of 18 commodity constituents, each of which is a sub-index of the S&P GSCI Index (Excess Return Commodity Index with each such sub-index itself comprised of exchange-traded commodity futures contracts) and is intended to serve as a benchmark value of a particular commodity.
The Index employs a strategy that is based upon modern portfolio theory and momentum theory. The Index is rebalanced monthly utilizing algorithms to take synthetic long and short positions in the constituents based on mathematical rules. These rules reset the sum of the weights of each constituents to zero and applies certain volatility and diversification constraints. The re-balancing of the Index will generally take long synthetic positions in those constituents with positive estimated future returns and short synthetic positions in the constituents with negative estimated future returns.
Modern portfolio theory analyzes the relationship between assets contained within a portfolio and allocates the weights of those assets in an effort to obtain an "efficient" portfolio with the highest expected return for a given level of risk. Momentum theory seeks to capitalize on positive and negative trends which can be expected to continue in the future.
Investors should read the Term Sheet and Brochure carefully before investing. FDIC insured.
JPMorgan Alternative Index Multi-Strategy 5 (USD) Market Linked Deposit
Alternative Index Multi-Strategy 5 (USD)
Basket Investment Style Constituents Momentum Style Strategies - 45% Allocation Equity Asset Classes - US Equity Momentum, European Equity Momentum & Japan Equity Momentum Interest Rates Asset Classes - Money Market Momentum US, Money Market Momentum Europe & Money Market Momentum Japan FX Asset Classes - EURUSD FX Momentum, USDJPY FX Momentum, EURJPY FX Momentum, USDCAD FX Momentum, AUDUSD FX Momentum & EURGBP FX Momentum Commodity Asset Classes - Commodity Momentum Energy & Commodity Momentum Non-Energy
Carry Style Strategies - 45% Allocation Equity Asset Classes - Equity Value Carry Strategy & Equity Small Cap Carry Strategy Interest Rates Asset Classes - Bond 2Y Carry Long Strategy, Bond 10Y Carry Long Strategy, Bond 2Y Carry Long-Short Strategy & Bond 10Y Carry Long-Short Strategy FX Asset Class - G10 FX Carry Strategy Commodity Asset Class - Commodity Carry
Satellite Style Strategies - 10% Allocation Equity Asset Classes - Mean Reversion US Strategy, Mean Reversion Europe Strategy, Mean Reversion Japan Strategy & Short Volatility Strategy
Leveraged Point-to-Point Appreciation of Monthly Rebalanced Synthetic Portfolio
Interest is paid at maturity based upon 105% of the gain realized in the JP Morgan Alternative Index Multi-Strategy 5 (USD) index over the term. The Index is rebalanced each month in order to maximize the estimated return for the synthetic portfolio without exceeding a given risk threshold. There is no cap on the gain. The underlying Bloomberg index symbol is AIJPM5UE.
The Index provides exposure to a portfolio of absolute return strategies and aims to generate consistent positive returns with low correlation to traditional asset classes. The underlying strategies are selected from three investment styles (Momentum, Carry & Satellite) and cover several asset classes within each style. Index weights are rebalanced monthly to target a volatility of up to 5%. The Index is algorithmic, with daily levels published to Bloomberg. The Index is constructed as an excess return index. The underlying style strategies are implemented across four asset classes: Equities, Interest Rates, FX and Commodities.
The underlying strategies represent three investment Styles: Momentum Styles - Seeks to capitalize on the observed tendency of many markets to trend either up or down for sustained periods. Carry Styles - Seeks to capitalize on the value differential on a relative basis between certain assets by notionally buying an asset that is higher yielding and notionally selling an asset that is lower yielding. Satellite Styles - Using mean reversion and short volatility strategies, it seeks to capitalize on the view that over the short term, markets are cyclical while under the short volatility strategy it aims to exploit the tendency of the implied volatility of an equity index to be higher than the volatility realized by the index.
On each re-balancing date, the Index methodology assigns an equal allocation of risk to the Momentum and Carry strategies (each with a 45% allocation) with the remaining 10% allocated to the satellite strategies.These risks are translated to notional weights based upon on the historical volatilities of the underlying strategies and the portfolio.
Investors should read the Term Sheet and Brochure carefully before investing. FDIC insured.
