Income Generator CDs
Income generator CDs are FDIC-insured Certificates of Deposit with periodic interest payments linked to a basket of equities or commodities. The income generator CD provides investors with the opportunity to earn periodic interest payments based on the average performance of a basket of 10-15 individual equities or commodities, subject to a cap and floor.
Income generator CDs are FDIC-insured investments that offer 100% principal protection, if held to maturity and the issuer is able to fulfill its obligation.
The income generator CD is created to offer a variable coupon based upon the equity or commodity basket’s equally-weighted average performance of the individual reference components, always versus their initial levels, subject to a cap and floor for each component. For traditional income generator CDs a variable coupon will be paid based upon the percentage change for each basket component between the closing level on the observation date versus the components initial price, subject to a maximum performance cap and a floor. For income generator CDs with an auto cap (“digital cap”) feature, a variable coupon will be paid based upon the percentage change for each basket component between the closing level on the observation date versus the component’s initial price. If the component price is greater than or equal to the initial price, the component performance will equal the auto cap rate. For both structures, if the component price is less than the initial price, the component performance will equal the greater of the percentage decline and the floor.
May Be Suitable for Investors Who Are:
- Looking for equity- or commodity-linked yield opportunities with the security of FDIC Insurance and 100% principal protection at maturity.
- Seeking to diversify their investment portfolio.
- Seeking semi-annual or annual income payments contingent upon the market.
- Willing to forgo some or all interest payments in exchange for the chance to earn above market coupons when it does pay.
- Low minimum investment: $1000 minimum initial purchase; $1000 increments thereafter
- Above-market coupon potential versus comparable fixed income CDs of the same term
- Investment term typically 4-7 years
- High credit quality: Typical issues are from banks with a credit rating that is investment grade or better, although credit quality should not be the sole basis for an investor’s decision
- FDIC-Insured and Principal Protected if held to maturity
- Estate feature, Survivors Option: Putable at par upon the death or adjudication of the owner
Considerations & Risks
- Principal Risk: Income generator CDs offer FDIC insurance and 100% principal protection, if held to maturity and the issuer is able to fulfill its obligation. If sold prior to maturity, the investor may receive less than their initial investment.
- Limited Return: The return is limited to the maximum variable coupon rate per year and therefore may be significantly less in comparison than the direct investment in the underlying assets. The investor does not receive any dividends or distributions from the underlying assets.
- Liquidity: Income generator CDs are not designed to be liquid; they are intended to be held to maturity. While there may be a secondary market, issuers are under no obligation to maintain one. Selling prior to maturity carries with it the risks inherent in factors that can affect marketability, such as volatility of the underlying assets, interest rate swings and developments affecting the underlying securities.
- Creditworthiness of the Issuer: The extent to which any principal is protected is subject to the quality of the issuer’s credit. Principal Protected Notes and CDs are subject to the risk that the issuer might not be able to meet scheduled interest or principal payments. The investor should investigate the creditworthiness of the issuer to evaluate its ability to meet the terms of interest and principal payment. For certificates of deposit of FDIC-insured banks or savings institutions the investor’s principal is protected up to $250,000 per depositor per insured bank. In addition, certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor, per insured bank. For more information, please visit FDIC.gov.
- Taxes: For full information regarding the tax consequences of income generator CDs, investors should consult their tax advisor.