Rates on certificates of deposit have been wallowing at record lows for years. In Bankrate's CD rates survey Wednesday, the average five-year yield clocked in at 0.79 percent. A $5,000 deposit today would grow to $5,200.65 by 2018.
Better than nothing. But, what if you had the possibility of earning 15 percent instead? That would be a lot more appealing, obviously.
A new CD from EverBank will offer hopeful gamblers the opportunity to do just that. The CD has the potential to earn 15 percent because the interest rate is linked to indexes, reflecting the performance of four emerging market currencies against the dollar. The currencies are from Turkey, India, Colombia and Mexico.
There are three caveats:
- There are no early withdrawals.
- Depositors could earn zero percent interest. If the actual yield is between 1 percent and 15 percent, savers will get at least 15 percent return on the five-year investment. If the performance is below zero, a depositor's principal is guaranteed but it will earned nothing for five years.
- Finally, investors must include the OID interest, or original issue discount, on their taxes each year until the CD matures.
"Annually, EverBank will issue a 1099 OID to the client at an implied rate that will be set at time of issue. Right now, for example, that might be 1.86 percent APY (annual percentage yield)," says Frank Trotter, president of EverBank Direct. "At maturity, if the total payout is more than this compounded amount, then a final 1099 will reflect that. If the CD pays out at the guaranteed return of principal, then the client can deduct the total of the 1099 OID and final 1099 for the maturity year's taxes."
So investors are out a few bucks every year for tax payments as they wait to see what happens. It's a risk, and the structure of the CD is much more complicated than a regular CD.
One thing to consider is that interest rates in the U.S. probably will rise over the time period. If rates in the U.S. rise relative to those in other countries, the dollar would, in general, strengthen against other currencies. Inflation and interest rates are among several factors that influence exchange rates between two countries.
Remember that the offer from EverBank lets investors bet that the value of the currencies from Turkey, India, Colombia and Mexico will appreciate relative to the dollar over the next five years. It's likely much more of a gamble than most traditional CD investors care to take, particularly since analysts predict future economic volatility in emerging market countries as advanced economies continue to recover.
Do you think the odds favor these currencies outperforming the dollar by any margin over the next five years? It's definitely a long shot.
What do you think -- would you take that bet?
Follow me on Twitter: @SheynaSteiner.
Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.