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Would you make a CD rates bet?

By Sheyna Steiner · Bankrate.com
Monday, August 26, 2013
Posted: 3 pm ET

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.

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6 Comments
Frank Nappa
September 01, 2013 at 9:04 am

Now that the chance of doubling your money is gone there's really nothing left. We should compare this MLCD to Everbank's standard 5 year CD, that way the risk of bank failure is removed. At 1.91% you would have almost $500 after 5 years. Why risk losing that safe return for a chance at $750? I don't think that the return of greater than 15% is likely. The dollar would have to depreciate against four other emerging currencies, My guess is they know more about it than me. We're at the carnival and it's probably a suckers bet.

Sheyna Steiner
August 30, 2013 at 9:52 am

Oh, you're right. Apologies to everyone, it's changed to reflect that.

Frank Nappa
August 30, 2013 at 5:44 am

I dont think the 15% is compounded.

Matt Lifshotz
August 27, 2013 at 12:57 pm

I agree the Everbank product is speculative and certainly agree that the current opportunity cost of guaranteed interest is at a low point.

However, I don't think that traditional and market linked CDs should necessarily be compared one to one as they reward customers in a different manner and, in many cases, attract completely different types of customers.

Sheyna Steiner
August 27, 2013 at 12:12 pm

I don't have a problem with products that offer potential market upsides with principal protection per se. I think there is a big question mark around what's going to happen with the dollar and emerging market currencies as quantitative easing ends. Investing in currency is a speculative endeavor. At least the opportunity cost is as low as it will ever be for CD investors. And that is really the main consideration -- second to whatever guesses someone may have around currency fluctuations -- the certain income forgone.

Matt Lifshotz
August 27, 2013 at 10:59 am

While I certainly concede that this is a more complicated CD than a standard 5 year interest bearing, it's an opportunity for those savers who are familiar with currencies to receive, potentially, the a higher upside than they'd be able to achieve with another standard CD product.

Consistently, I see the argument being made against Market Linked CDs because you "may earn zero interest". While that is certainly true, there should be a good deal of comfort knowing that you cannot lose any money (except early withdrawals).

The MLCD is a hybrid product, meant to provide some of the benefits of market appreciation and some of the benefits of a standard CD like principal protection and FDIC insurance. Of course, there's a little give on each legacy product to achieve the final MLCD product.

Finally, you mention OID which may cause tax payments on interest that is not yet realized. However, there are more and more MLCD products that are steering away from this method of interest accrual where interest is only taxed when received...whether that be annually or at the end of the product term.

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