A structured CD is a type of deposit account offered by banks that links its potential interest payments to the performance of various market indices or assets, rather than offering a fixed interest rate.
Based on available information, a structured CD is defined as follows:
Structured CDs are FDIC insured deposits with interest payments that are contingent upon changes in the levels of indexes, individual equities, and interest rates, or combinations of indexes, individual equities, and interest rates.
Key Characteristics of Structured CDs
Drawing from this definition, several core features distinguish a structured CD:
- FDIC Insured: A primary characteristic is their status as FDIC insured deposits. This means they offer the same level of deposit insurance as traditional CDs, typically up to the standard limits per depositor, per insured bank, for each account ownership category.
- Contingent Interest Payments: Unlike standard CDs with a predetermined interest rate, the interest earned on a structured CD is contingent. This means the amount of interest paid (or whether any interest is paid at all) depends on external factors.
- Market-Linked Returns: The interest payments are linked to the changes in the levels of specific market benchmarks. According to the definition, these can include:
- Indexes: Such as stock market indices (e.g., S&P 500, Nasdaq).
- Individual Equities: The performance of specific company stocks.
- Interest Rates: Changes in prevailing interest rates.
- Combinations: The performance could be tied to a mix of these factors.
The specific formula determining how the interest is calculated based on the movement of the linked index, equity, or rate is set at the time the structured CD is issued. This structure allows the potential for higher returns than traditional CDs if the linked assets perform well, but also means interest payments can be lower or zero if they do not meet the conditions specified in the CD's terms.
