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Market-Linked CDs

What is a Market-Linked CD?

A Market-Linked Certificate of Deposit (MLCD), also called an equity-linked certificate of deposit, is a type of certificate of deposit (CD) that is issued by a bank. Unlike a regular CD that has a fixed interest rate that is paid periodically, the return of an MLCD is based on the market performance of an underlier. The underlier can be an equity index, an exchange-traded fund (ETF), a single stock, a commodity, a currency or a basket of any of these.

At maturity, investors receive the full initial amount invested plus an additional amount based on the return of the underlier. Investors have downside protection if held to maturity and will receive at minimum their full principal invested if held to term.

What are some benefits of an MLCD?

MLCDs guarantee the return of principal only at maturity with the potential to earn an additional amount based on the performance of the underlier.

MLCDs may be an attractive option to investors seeking:

  • FDIC-Insurance. MLCDs carry FDIC insurance protection on the invested amount only (not on any potential enhanced return based on the performance of the underlier) and is subject to FDIC coverage limits ($250,000 per account owner per issuing bank). Please refer to the FDIC – Your Insured Deposits Brochure for more information regarding FDIC insurance and limits.
  • 100% Principal Protection at Maturity. The initial investment in the MLCD is guaranteed to be returned only at maturity. Please note this guarantee does not apply if the MLCD is sold prior to maturity.
  • Potential Enhanced Returns. If held to maturity, MLCDs allow investors to receive their full principal invested plus an additional payment linked to the return of the underlier.

For full details, please read the applicable offering document of any investments you choose to make.

What is the payout of an MLCD at maturity?

At maturity, investors receive the full initial amount invested plus an additional amount based on the return of the underlier. For more details on exact payments at maturity, please read the applicable offering document of any investments you choose to make.

The return of the underlier is calculated as follows:

  • The Initial Level is typically the closing price of the underlier on trade date
  • The Final Level is typically the closing price of the underlier on the determination date.
  • The trade date, determination date, Initial Level and Final Level of the underlier are always specified in the accompanying offering document of any investment you choose to make.
  • The Max in the formula indicates that the investor will only participate in positive returns of the underlier.

In some cases, the performance is also multiplied by a participation rate that may be greater than 100%, allowing you to earn an enhanced return.

For full details, please read the applicable offering document of any investments you choose to make.

What is a participation rate?

The participation rate determines how much of the underlying index’s increase will be used to compute the payout. For example, if the participation rate of the market-linked CD is 110 percent and the underlying index gains 10 percent, the market-linked CD will produce a return of 11 percent (110 percent of 10 percent).

What are risks of an MLCD?

MLCDs may not be a suitable investment for all investors. Please note the following selected risks. For full details, please read the applicable offering document of any investments you choose to make.

  • Liquidity Risk. MLCDs do not trade on exchanges, are thinly traded, and can be difficult to price. Due to limited liquidity, the market price of an MLCD may be significantly discounted if redeemed or sold prior to maturity. MLCDs should be considered a buy-and-hold investment. Consider carefully before purchasing an MLCD if you may not be able to hold the MLCD until maturity.
  • Market Risk. The price of an MLCD during its term and at maturity can be affected by many factors including volatility, interest rates and other market forces. These may impact the return of the MLCD. Past performance of the underlier is no guarantee of future performance.
  • Credit Risk. MLCDs bought in excess of the FDIC insurance limits are subject to the credit risk of the issuing bank. You should be aware that only the amount you initially invested in the MLCD will be insured up to FDIC coverage limits.
  • Performance Risk. The return of the MLCD depends on the performance of the underlier and is not guaranteed. The return of the MLCD may be different than the return of the underlier’s performance. Reasons for the difference may be subject to terms of the MLCD or market conditions.
  • Statement Pricing. Statement pricing may be less than the original amount invested and is subject to market conditions.

Can I sell an MLCD before maturity?

Yes, you can sell the MLCD you chose to purchase prior to maturity, but there may be a limited secondary market that could make it difficult to sell. MLCDs are intended to be held until maturity. Even if you are able to sell your MLCD prior to maturity, you should be aware of the following: due to risks associated with MLCDs including but not limited to liquidity risk, market risk, credit risk, and performance risk you are not guaranteed the return of your principal investment.

The price of an MLCD at any time, including the price at which the issuer of the MLCD may buy or sell the them, reflects many factors that cannot be predicted such as credit spreads and the issuer’s pricing models.

To sell your MLCD prior to maturity, please contact Customer Service at 1-855-586-6843 (9am-6pm ET Monday – Friday).

For full details, please read the applicable offering document of any investments you choose to make.

What are the fees associated with MLCDs?

MLCDs carry placement fees. Upon an initial purchase of an MLCD at Motif, there will be an initial placement fee that is included in the applicable offering price. This placement fee is disclosed in the accompanying offering document of any investment you choose to make. Other fees and costs associated with MLCDs are likely to adversely affect the price at which you can sell or redeem your MLCD prior to maturity.

For full details on fees and costs associated with MLCDs, please read the applicable offering document of any investment you choose to make.

What are the tax considerations associated with MLCDs?

An investor in MLCDs is subject to federal income tax rules. You may have to pay income taxes each year on calculated annual income based on a comparable yield provided by the issuing bank, even though you may not receive a cash payment until maturity.

In addition, any gains or losses realized upon the sale of the MLCD prior to maturity may be treated as ordinary income. For full details, please read the MLCD offering circular of any investments you choose to make and consult your tax advisor for more details.

Where can I learn more about MLCDs?

Additional, general information, can be found on the SEC site here – SEC Fast Answers, Equity-Linked CDs – or in the applicable offering document of any investment you choose to make.