A low risk alternative to a traditional CD
Wednesday, April 21st, 2010Sometimes the guarantee of a ‘sure thing’ is worth its weight in gold, especially when it comes to your finances. And when it comes to investing your money, there are few things safer than a certificate of deposit (CD). With a CD you know exactly how much interest you will earn, as well as how long your money will be tied up. And there is always the comfort of knowing that your principal is insured by the FDIC.
However, you are paying for that security by receiving a lower return on your money than some other investment opportunities, and may expose your portfolio to inflation risk. One of those opportunities is called a Structured Note. This product is similar to a CD, in that it also has a set term, and a set rate of return. The two investments begin to differ, in that a structured note is a hybrid security ‘tied’ to an index such as the S&P 500.
For example, this month’s Credit Suisse 6 month callable yield note offers a 5% return (10% annually) on your investment. This particular note is tied not only to the S&P 500, but also the gold market.
By comparison, the current interest rate on a 6 month CD with Chase bank is a mere 0.25%. A similar 6 month term with Bank of America doesn’t fare much better with a 0.35% return.
For example, if John and Jane Client invested $25,000 in the Structured Note offered by Credit Suisse this month, the note would mature in six months and the clients would be issued their principal plus $1,250 in interest. By comparison, the 6 month CD with Bank of America would only yield an interest payment of $87.50 and the Chase CD would only produce $62.50. Quite the difference!
If you have any questions, or think that a structured note might be for you, don’t hesitate to call us and we can review!