Market Link CD

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Mr.BB
Posts: 545
Joined: Sun May 08, 2016 10:10 am

Market Link CD

Post by Mr.BB » Tue Mar 13, 2018 7:16 pm

Does anyone know how Market Link CD's work?
What type of fees are associated with it?
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

birdy
Posts: 315
Joined: Sun May 02, 2010 7:31 pm

Re: Market Link CD

Post by birdy » Tue Mar 13, 2018 7:28 pm

Sorry. This information is above my pay grade! Have never thought to use it as part of my retirement plan.

birdy

Mr.BB
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Re: Market Link CD

Post by Mr.BB » Tue Mar 13, 2018 7:31 pm

I was pitched this by a financial planner. My first was red flag was when he said there is no risk. I told him, everything has some level of risk. I was just curious about it, I just wanted to learn a little more to be educated about how these products work, and I am already finding out some of the details; which of course are negative.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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Rob5TCP
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Re: Market Link CD

Post by Rob5TCP » Tue Mar 13, 2018 9:54 pm

I had one years ago -- only a small amount as a test. It made more than a regular CD (the market was up substantially during that period). There were so many gotchas - first off; you receive no dividends, my upside was capped.
I didn't renew after it matured and was finished with it. The document that I received and read was voluminous. It did have a short explanation of all the terms (and they were somewhat onerous).

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tfb
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Re: Market Link CD

Post by tfb » Wed Mar 14, 2018 12:05 am

Mr.BB wrote:
Tue Mar 13, 2018 7:31 pm
I was pitched this by a financial planner. My first was red flag was when he said there is no risk. I told him, everything has some level of risk. I was just curious about it, I just wanted to learn a little more to be educated about how these products work, and I am already finding out some of the details; which of course are negative.
As any other FDIC-insured CDs, there is no risk of losing money in a market linked CD. That part is true. But there is risk that it won't pay as much as another CD you can buy now (it can pay more as well). There is risk it won't return as much as a mutual fund or ETF you may decide to buy now. So whether there is risk depends on what risk you are talking about. By the way the person who tried to sell you this isn't really a financial planner. Financial planners plan. They don't sell CDs.
Harry Sit, taking a break from the forums.

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grabiner
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Re: Market Link CD

Post by grabiner » Thu Mar 15, 2018 9:55 pm

If you actually wanted to do this, you could do it yourself, with just three transactions.

Buy a call option on the S&P 500 at $2750 (about its current value)
Sell a call option on the S&P 500 at $3250.
Put the difference between these option prices, and the rest of your cash, into a CD which will be worth $2750 at maturity.

If the S&P finishes at less than $2750, you get $2750 from the CD.
If the S&P finishes between $2750 and $3250, you get the S&P value, because the $2750 option will have value equal to the S&P value minus $2750.
If the S&P finishes above $3250, you get $3250, because the value of the $3250 option is $500 less than the value of the $2750 option.

The bank which is providing this offer is doing the same thing, but taking an extra cut for itself. (And the cut is likely hidden; for example, while you get the value of the S&P index, you don't get the value of any dividends, which you would receive in cash if you bought a stock fund.)
Wiki David Grabiner

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