Investing in Brokered Certificates of Deposit

Certificates of Deposit (CDs) Can Play an Important Role in a Balanced Portfolio

This week’s negotiable CD rates:*

3-mos.	6-mos.	1-year	2-year	3-year	4-year	5-year
0.20%	0.35%	0.75%	1.70%	2.40%	2.75%	3.20%

As of November 10, 2009, annual percentage yields (APY) represents the interest earned based on simple interest calculations. Rates are subject to change and availability. Minimum purchases may apply.

* Please read the CD Disclosure Document (PDF)

The first step toward becoming a successful investor is working with a professional advisor to develop a customized financial plan. This plan should be based on your specific financial goals and take into account your current financial situation, future needs and, most important, your tolerance for risk. Your financial advisor may recommend including CDs in your portfolio.

If your primary goals include principal preservation and income, CDs can serve as a sound portfolio foundation. CDs, which are insured by the Federal Deposit Insurance Corporation (FDIC), usually provide higher yields than savings or money market accounts. FDIC insurance does not protect against loss due to early redemption. CDs, depending on their terms, can also be used as safe havens for cash, a way to save in anticipation of future needs or goals such as retirement, and as interim investments before other investment opportunities arise.

Not All CDs Need to be Purchased Directly from Banks

Many investors assume CDs can only be purchased from a bank, not realizing they have a choice. Today, you can purchase CDs either directly from a bank or through your brokerage account. This brochure highlights the similarities and differences between each so you can choose what is most appropriate for your individual circumstance.

What Are the Differences Between Brokered CDs and Bank CDs?

A number of banks offer their CDs through brokerage firms, such as Raymond James. These CDs, referred to as “brokered CDs,” may be more complicated than those offered directly from a bank. However, they may also be better suited to meet certain investment objectives.

Length of Term and Returns

When you purchase a CD directly from a bank, you are investing money for a specified amount of time in return for the quoted interest rate. The bank with which you deposit funds will pay the interest, usually at maturity and, depending on the terms, the interest may be compounded. If you need access to cash prior to maturity of your CD, there may be an “early withdrawal” penalty or you may have to forfeit a portion of the interest you have earned.

Brokered CDs generally have predefined terms as well, but often are longer-term deposits than CDs offered at banks. They often pay coupon income at intervals and their maturities may vary from three months to 20 years. While brokered CDs carry the same FDIC insurance benefits as bank CDs, their structure more closely resembles that of a traditional bond than a bank CD.

Degree of Liquidity

Liquidity is an important difference between brokered CDs and bank CDs. Brokered CDs trade in the secondary market at prevailing prices, which may be more or less than the original investment. The CD market price largely depends on the level of interest rates at the time of sale. However, there is no option for early withdrawal, and again, selling a brokered CD prior to maturity may bring in more or less than the equivalent of the proceeds of a bank CD, less any early withdrawal penalty. Although not obligated to do so, Raymond James and other broker/dealers intend to maintain a secondary market in these securities by matching sellers and buyers. See further discussion under “Liquidity Prior to Termination.”

The chart below helps to summarize the similarities and differences between CDs offered directly at a bank and brokered CDs that are offered through brokerage firms such as Raymond James. Please be aware that variations may exist in both cases.

Comparison of Traditional and Brokered CDs

Traditional CDs		Brokered CDs
FDIC Insurance	FDIC-insured up to $100,000* in principal and interest per financial institution per beneficial owner. Some retirement accounts qualify for coverage up to $250,000.	FDIC-insured up to $100,000* per financial institution per beneficial owner. Some retirement accounts qualify for coverage up to $250,000.
Term	Usually short-term alternatives.	Range from three months to 20 years. One of the unusual variations may include call features – the issuer’s ability, at its option, to redeem these CDs prior to the designated term.
Returns	Rates are locked in for term and interest payment is usually at maturity.	Rates are locked in for term and interest is usually paid at specified intervals, such as monthly, semiannually or at maturity.
Liquidity	Early withdrawals with penalty are usually permitted.	Only secondary market liquidity at prevailing price – proceeds may be more or less than the original investment. Sensitive to current levels of interest rates at the time of sale. Additionally, brokered CDs offer estate protection, which is discussed on the following pages.

*FDIC temporarily increased insurance coverage through December 31, 2013, to $250,000 for deposits held in different ownership categories, including single accounts, joint accounts and trust accounts. This means that a $250,000 CD with a maturity date after December 31, 2013, will revert to the $100,000 limit after December 31, 2013.

The Benefits of Buying CDs Through a Brokerage Account

Purchasing CDs through a brokerage account offers investors the following:

A Simplified Investment Process

In general, purchasing CDs through a brokerage account can simplify the financial planning and asset allocation process because all investments are held in one place. After all, it’s easier to analyze returns and exposure to risk when you can see the big picture, including all your investments. This is especially important because many people forget that cash as well as CDs are investments, an important asset class in any asset allocation model, and should be included in a portfolio analysis.

Federal Deposit Insurance

All CDs offered through Raymond James are insured by the Federal Deposit Insurance Corporation to a maximum of $100,000* in principal and interest per financial institution per beneficial owner. Some retirement accounts qualify for coverage up to $250,000. This insurance does not guarantee against market losses due to early redemption or to selling CDs in the secondary market prior to maturity.

The FDIC’s brochure Your Insured Deposit explains deposit insurance coverage. It is available on the FDIC website at fdic.gov. Your financial advisor can also provide a copy or you can contact the FDIC by phone at 877-275-3342.

One-stop Shopping for Additional Insurance Protection

If you wish to purchase CDs worth more than $100,000* (or $250,000 for certain retirement accounts) – the FDIC insurance limit per beneficiary interest per institution – you can easily keep your entire CD portfolio insured, because Raymond James offers CDs from issuers across the country. Owning CDs from various institutions in effect gives you insurance coverage for your entire CD portfolio, as the FDIC insures each institution separately.

It is important to track your total deposits – CDs, checking, savings, trusts and money market deposit accounts – at each institution to ensure you do not exceed the FDIC coverage limit. To check, add up all your accounts to be certain they do not exceed $100,000* (or $250,000 for certain retirement accounts) at any one institution. Banks often have similar names, so check location and other details that show them to be different institutions – and make sure they are not branches of the same bank. Otherwise, you could be placing your capital at risk. Each institution is assigned an FDIC certificate number, which is available at fdic.gov.

*FDIC temporarily increased insurance coverage through December 31, 2013, to $250,000 for deposits held in different ownership categories, including single accounts, joint accounts and trust accounts. This means that a $250,000 CD with a maturity date after December 31, 2013, will revert to the $100,000 limit after December 31, 2013.

Flexibility of Length of Investment

Brokered CDs offer a wide selection of maturities and competitive yields. You can plan to offset future liabilities with maturities usually ranging from three months to 20 years. The term is set and locked in for the life of the CD, unless that particular CD has a call option that allows the issuer to redeem the CD prior to maturity.

Long-term CDs generally are not suitable for those who have a short-term investment horizon or who will need access to cash sooner than the stated maturity. Long-term CDs experience greater price volatility than short-term CDs.

Callable Feature of Brokered CDs

In a relatively unusual variation, some institutions offer callable CDs, which allow the bank, at its option, to redeem CDs at par value prior to the stated term. It’s important to understand that the option to call the CD belongs to the bank, not the investor.

This type of CD is similar in structure and behavior to traditional agency or corporate callable bonds.

Since the timing – or even occurrence – of the call cannot be predicted, you should consider multiple scenarios when analyzing the potential total return of these CDs, as the yield to call may be different than the yield to maturity. You should also consider eventual reinvestment opportunities. For example, callable CDs are more likely to be called in a lower interest rate environment, and you may be unable to reinvest funds at the same rate as the original CD. Therefore, a consideration should be whether or not the extra yield offered at the time of purchase is worth a potential reinvestment at lower rates in the future. Many of these decisions are based on your perception of the future direction of interest rates.

Callable CDs are typically issued with longer maturities and can provide potentially higher yields. However, you should not assume that callable CDs will actually be called prior to term and therefore, callable CDs are suitable only if you are prepared to hold them until maturity.

Choice of Cash Flows

Brokered CDs with maturities of one year or less typically pay simple interest at maturity. CDs with longer maturities usually offer monthly, quarterly or semiannual interest payments. These payments become available in the account for withdrawal or for other investment opportunities.

Most CDs pay a fixed coupon for the term of the CD. Your payments are predictable.

However, some CDs have coupon payments that vary depending on a predetermined schedule set at the time of issuance. The step-up callable CD features predetermined coupon sequences. The coupon variations may start below the current fixed rate coupon of comparable maturity and may increase over time. Of course, these types of CDs may be called at the option of the issuer after a non-callable period. The step-up feature typically appeals to those who want their income to grow, possibly as protection against inflation or to pursue a higher total rate of return under the assumption of rising interest rates.

Variable-rate CDs adjust their coupon payments by a predefined percentage or spread over the referenced rate, such as a Treasury bill or an inflation indicator such as the Consumer Price Index. The rate of return on variable-rate CDs will depend on changes to the reference rate.

It is important to compare the features and benefits of each investment alternative to determine which is most appropriate based on your portfolio objectives. Potential investors in step-up or adjustable-rate CDs may initially face lower current returns than those of fixed-coupon comparable CDs, but may have the opportunity to increase returns over time, assuming the CD is not called by the issuer. The fixed-rate investor may receive a higher current rate initially, but will be locked in for the duration of the investment. For some investors, diversification of investments through CDs with different terms may be the best alternative.

The Need for Specific Returns

Ordinarily, long-term CDs offer higher returns than short-term CDs and they reflect current interest rate levels. There are several yields to consider when evaluating a brokered CD offering. These different yields take into consideration the coupon rate, the purchase price and the number of years until a CD’s maturity or call date. “Yield to maturity” (YTM) represents the return an investor will receive if the CD is held to term. The “annual percentage yield” (APY) is also quoted. It represents the interest earned based on a simple interest calculation that includes the effect of compounding. “Yield to call” (YTC) is the return earned if a CD is called prior to maturity. “Current yield” (CY) measures the immediate return on the cash investment or on the income portion of the investment. It is the relationship between a CD’s annual cash flow and its purchase price. Since many CDs have multiple redemption features, it is a standard practice to quote the yield to call or yield to maturity, whichever represents the lower return to the investor.

Liquidity Prior to Termination

CDs are most suitable for those who purchase and hold them to maturity, as this assures redemption at par value.

In the event your financial objectives change, and you need to cash out all or a portion of your original CD investment prior to maturity, brokered CDs are negotiable. Although broker/dealers have no obligation to do so, they may maintain a secondary market for the purchase and resale of brokered CDs. This means that CDs can be bought and sold between investors with broker/dealers acting as intermediaries.

Investment charges are included in the offered price and/or sale proceeds and quoted returns are based on 100% of the invested principal. Depending on the term of the CD, minimum investments may apply. Your financial advisor will provide you this information prior to investing.

If a CD is sold prior to maturity, the value of the CD will be subject to market considerations including, but not limited to, interest rate changes. This could result in a significant loss from the initial investment amount. This is true of all brokered CDs. If interest rates have fallen since the original purchase, the CD may be sold at a profit. On the other hand, if interest rates have risen, there will be less demand for the lower-yielding CDs and the sale may be at a lower price than the original purchase. Since callable CDs tend to have longer maturities, their price sensitivity to interest rate changes may be greater. You should also note that, in a lower interest rate environment, it is less likely that callable CDs will trade at a premium because of the increasing possibility of a call at par.

In the event that a financial institution becomes insolvent, one of three things may occur: The original terms of the CD may be left in place, CDs may be redeemed or a new interest rate may be set. The FDIC will make every effort to make timely payments of insured deposits, but investors should be aware that access to their funds may be temporarily limited.

Interest Rate Effects on CD and Bond Values

Years Remaining to Maturity
Interest Rate Change	2 years	5 years	10 years	30 years
2%	-2.0%	-7.0%	-13.5%	-24.0%
1%	-1.0%	-3.6%	-7.0%	-13.0%
-1%	1.0%	3.80%	7.5%	16.5%
-2%	2.0%	7.50%	16.0%	37.0%

The chart above was created by Raymond James for illustrative purposes only. The numbers are not indicative of any specific CD’s performance. Exact amounts will depend on the maturity, structure, current level of rates and the speed with which interest rates rise or fall. The example above assumes the CDs are non-callable and that the change in the rate occurs over one year.

Estate Protection

Many brokered CDs offer an estate protection feature, which provides that, upon evidence of the death of at least one of the beneficial owners of a CD, the estate has the option to liquidate the CD holdings at par value with accrued interest without incurring a penalty. Should an estate need access to cash prior to the maturity of the CDs in the portfolio, it is important to determine whether the CDs would be trading at a premium in the secondary market. If the secondary market value is higher than par, then it would be more appropriate to sell the CD in the secondary market rather than put it back to the issuer at par.

The Interest Rate Manager – Laddering Maturities

Although it is impossible to control or predict future interest rates, your financial security may depend on your successful management of interest rates. Brokered CDs, much like bonds, have a fixed income stream and stated maturity. By investing in a short-term CD, you have the ability to reinvest funds as rates go up, but you’ll typically earn a lower rate of return associated with short-term maturities. And those who are looking for the highest possible yield and buy long-term CDs lock themselves into higher rates that may or may not keep up with inflation or interest rates. A time-honored strategy is diversification – purchasing multiple CDs with different maturities. “Laddering maturities” reduces much of the complexity of investing and is appropriate when you are concerned about stabilizing returns in unpredictable market environments. A laddered CD portfolio is structured by purchasing several CDs with consecutive maturities. As each CD matures, the proceeds are reinvested in a new CD having a maturity that corresponds with the longest term on the ladder, which often provides the highest yield.

Through this strategy, you can benefit from blending higher long-term rates with short-term liquidity. The resulting diversification can help reduce risk, improve yields and provide reinvestment flexibility, while also accounting for liquidity concerns. However, you should be aware that diversification does not guarantee a profit nor protect against losses in declining markets.

Convenience of Recordkeeping

In addition to the trade confirmation you receive at the time of purchase, CDs are reported monthly on your regular Raymond James statement, along with all other investments you hold at the firm. These evaluations may differ from actual bids, and if the CD is sold in the secondary market, the proceeds may differ from statement pricing. Again, when held to maturity, the investor will receive par value.

Having one consolidated statement can be convenient, giving you the opportunity to evaluate returns and/or risk. Future purchases are also made easy and can be accomplished with one simple telephone call to your financial advisor.

Brokered CDs are issued by banks via a “master CD” to deposit brokers who in turn offer interests in the master CD to individual investors. The FDIC insurance flows through to the owners of the individual interests and those interests are subject to the same limitations as CDs that are purchased directly at a bank. No physical certificates are issued.

Considerations

As discussed, while brokered CDs carry the same FDIC insurance benefits as traditional bank CDs, they also have a number of additional features that affect the rate of return and degree of risk.

They can be subject to transaction costs not typically associated with a traditional CD. Most important, brokered CDs offer liquidity prior to maturity as long as a secondary market is available. A brokered CD carries market risk as to its principal value, unlike traditional bank CDs. Please remember that traditional bank CDs are often short-term investments. Before you decide whether to purchase a CD directly from a bank or brokerage firm, ask questions and understand all of the terms:

• Understand when the CD matures and how much and how often it pays interest;
• Find out if the issuers have the right to terminate or “call” the CD at their option prior to the stated maturity. Compare the yields quoted versus those of non-callable alternatives;
• Ask about secondary market liquidity in case it is necessary to cash out prior to maturity. For brokered CDs, what is the potential for loss if rates go up? For bank CDs, what are the penalties for early withdrawal?
• Always identify the issuer as well as add up all deposits with that bank in order not to exceed the FDIC insurance coverage limitations;
• And most important, consider how the investment alternative fits into your investment goals. Brokered CDs may not be suitable for everyone.

Your financial advisor can provide complete information, including current CD rates and terms that reflect charges and expenses. Please ask for the CD Disclosure Document (PDF), which includes comprehensive information about the Brokered Certificates of Deposit program, as well as FDIC coverage under different ownership scenarios.

For more information about CDs, please contact your Raymond James financial advisor and visit:

• raymondjames.com;
• The Federal Deposit Insurance Corporation’s website for details about federal deposit insurance at fdic.gov, or call the Information Center at 877-275-3342;
• The U.S. Securities and Exchange Commission’s Certificates of Deposit: Tips for Investors at www.sec.gov/investor/pubs/certific.htm; and
• Investing in Certificates of Deposit – The Securities Industries and Financial Markets Association at investinginbonds.com.

The Raymond James Advantage

Professional advice and, in many cases, professional management, are key elements of successful financial planning. Fixed income investments, including CDs, by their very nature, provide investors an opportunity to initiate investment strategies that complement individual objectives. Those who want to create a sound portfolio foundation based on predictable returns and preservation of principal may wish to implement fixed income investment strategies suitable to their individual needs and risk tolerance levels. Once initiated, most fixed income strategies require periodic review.

Raymond James financial advisors assist investors in creating well-diversified fixed income portfolios designed to perform in unpredictable market environments. The objective of these portfolios is to preserve investors’ capital and minimize their risk while maximizing returns.

To find out more about CDs and other fixed income services offered by Raymond James, please contact your financial advisor today.

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