ANSWERS: 1
  • A structured certificate of deposit (CD) is a medium-term savings investment that offers a fixed rate of return for a specific period of time. The word "structured" here means that the CD performance is linked to that of an underlying asset or assets, usually a combination of a bond component and an option component packaged together. This type of CD is offered by Federal Deposit Insurance Corporation (FDIC) insured banks or savings institutions, and is insured by the FDIC up to $250,000 per depositor, per insured bank until Jan. 1, 2014. On Jan. 1, 2014, the federal deposit insurance limit returns to $100,000.

    Functions

    When you buy a CD, you invest a fixed sum of money for a specific period of time, perhaps six months, one year, five years, or more, and, in exchange, the bank or savings institution pays you interest, usually at regular intervals. The longer you commit your money in a CD, the higher the interest rate your money will earn. When you cash in your CD, you receive the money you originally invested plus any accrued interest. If you redeem your CD before it matures, you may have to pay an "early withdrawal" penalty or give up a portion of the interest you earned. How well a structured CD does is based on the performance of the underlying asset or assets. Some examples of underlying assets are equities (stocks, interest rates, commodities, inflation (Consumer Price Index), currencies. Of course, your initial investment is protected and your rate of return is guaranteed, so the bank or savings institution is taking the risk on the underlying assets.

    Benefits

    Two benefits of structured investments are access and personalization. Access means that by investing in a CD issued by a bank, you are able to take advantage of the bank's trading capabilities, something that might not be available to you as an individual investor. Also, you can determine your own financial goals and risk tolerance, and invest accordingly. Do you want to invest your money for one year, five years or longer? You can decide and make choices based on your personal circumstances.

    Considerations

    Because the rate of return is guaranteed, a CD is regarded as a low-risk investment, especially when compared with other types such as stocks and bonds.

    Warning

    Before you purchase a CD, ask to see the maturity date in writing. Make sure you understand all elements of your financial transaction. Do not sign any paperwork that you are unsure of.

    Source:

    SEC: High-yield CDs

    Structured Investments

    FDIC: Your Insured Deposits

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