Market-linked CD

A market-linked CD (MLCD) is also referred to as an equity-linked CD, market-indexed CD or simply an indexed CD as well. It is a specific type of certificate of deposit that is linked to the performance of one or more securities or market indexes, like the S&P 500. Additionally, the term length is usually much longer, with periods ranging over many years rather than several months.

Not all investors are as familiar with this type of certificate of deposit as compared to conventional CDs and similar deposit accounts because market-linked CDs are not as common. New York Times writer, Leonard Sloane, explains, "only a few financial institutions have created such certificates, [though] many others are testing or considering similar products."

Market-linked CDs are also a type of "structured" investment, which means they are created in order to meet an investor's specific financial goals. They combine the long-term growth potential of equity or other markets with the security of a traditional certificate of deposit.

Prior to the full repeal of the Glass-Steagall Act in 1999, traditional banks were prohibited from offering investment mutual funds to customers. Eager to increase their competitiveness with non-banks, traditional banks began experimenting with FDIC-insured products that would combine the safety of principal preservation with the growth of market-based returns.

The first market-linked CD was offered by Chase Manhattan Bank in March 1987.

A Market-linked CD's performance is dependent upon the performance of a market or index. As the market goes up, so does the CD's potential return. Conversely, if the value of the market or index falls, the return on the market-linked CD will, too. Some issuers of market-linked CDs guarantee a base return to guard against a zero return should interest rates fall, though this is not always the case. There is a possibility of earning no interest during an economic downturn.

The participation rate is the percentage at which a market-linked CD's annual return will correspond to the performance of the index it is tied to. For example, an index sees a 20 percent gain, but the indexed CD has a participation rate of 80 percent. The CD will produce a return of 16 percent, which is 80 percent of 20 percent. The participation rate can be below, at or above 100 percent.

...
Wikipedia