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	5-year
2.35%	2.70%	3.45%	4.20%	4.45%	4.95%

As of August 19, 2008, annual percentage yields (APY) represent 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. Raymond James financial advisors provide professional guidance in creating financial plans and will work with you in developing strategies and choosing investment alternatives to help achieve your personal objectives. Based on your individual needs and goals, we may recommend including CDs in your portfolio.

Like many investors today, you may worry about outliving your money. After all, statistics show retirement is lasting longer and costing more than ever before. For investors with this concern, but who are willing to take appropriate risk, equities can potentially provide for portfolio growth by helping to protect the purchasing power that inflation can erode. However, many investors are unwilling to put their money at risk and require the comfort of knowing their principal is protected. In many cases, these investors also need steady cash flows to supplement their current income.

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. CDs can also be used as a safe haven for cash, a way to save in anticipation of future needs or goals such as retirement, and even as a temporary parking place for funds that can be used when 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 the financial institution. However, they may also be better suited to 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. If you need access to cash prior to maturity of your CD, there may be an “early withdrawal” penalty or you may have forfeit a portion of the interest you’ve 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 another 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, they do not have the option of 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.

The chart on the next page 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 CD's	Brokered CD's
FDIC Insurance	FDIC limits the amount insured (including principal and interest) for all deposits held in the same capacity per issuer to $100,000 per depositor, or $250,000 for certain retirement accounts.	FDIC limits the amount insured (including principal and interest) for all deposits held in the same capacity per issuer to $100,000 per depositor, or $250,000 for certain retirement accounts.
Term	Usually short-term alternatives to money market instruments.	Range from three months to 20 years. One of the unusual variations may include call features – the issuer’s ability, at their option, to redeem these CDs prior to the designated term.
Returns	Rates are locked in for term and, unless negotiated, usually interest payment is at maturity.	Rates are locked in for term and interest is usually paid at specified intervals such as monthly or semi annually.
Liquidity	Usually early withdrawals with penalty are 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.

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 the returns and the 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 considered investments, an important asset class in any asset allocation model, and should be included in their portfolio analysis.

Safety of Federal Deposit Insurance

All CDs offered through Raymond James are insured by the Federal Deposit Insurance Corporation. FDIC limits the amount insured (including principal and interest) for all deposits held in the same capacity per issuer to $100,000 per depositor, or $250,000 for certain retirement accounts. The full faith and credit of the U.S. government backs CDs against default by the depository institution. However, this insurance does not guarantee against market losses due to early redemption such as 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 800-276-6003 or by e-mail at publicinfo@fdic.gov.

One-Stop Shopping for Additional Insurance Protection

If you have funds in excess of the $100,000 FDIC insurance limit, Raymond James offers CDs from many issuers across the country to expand your coverage. Because the FDIC limits the amount insured (including principal and interest) for all deposits held in the same capacity per issuer to $100,000 per depositor, or $250,000 for certain retirement accounts, you can purchase CDs from multiple financial institutions to increase your FDIC coverage.

To avoid exceeding the FDIC insurance coverage limitations, you should always keep track of total deposits with any one institution to ensure that total deposits, including CDs, do not exceed $100,000 per depositor, or $250,000 for certain retirement accounts, and, therefore, are fully covered by FDIC insurance. Identify the issuer and add up all deposits with that bank. Many banks have similar names, so it is also important to identify the financial institution’s location. Otherwise, you may be placing your capital at risk.

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 call 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.

The Callable Feature of Brokered CDs

In a more unusual variation, some institutions offer callable CDs, which allow the bank, at its option, to redeem CDs prior to the stated term. Those who invest in callable CDs usually receive higher yields than comparable non-callable CDs to compensate them for the reinvestment risk of having their CDs redeemed prior to term. It’s important to understand that the option to call the CD belongs to the bank, not the investor.

Before purchasing a callable CD, you should decide if the extra yield offered over comparable non-callable CDs is worth the reinvestment risk should the CD be called away. 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 that of the yield to maturity. You should also consider the 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. Again, was the extra yield offered at the time of purchase worth this potential reinvestment at lower rates? 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 and fixed. 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 an inflationary hedge, 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 the T-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. 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 as 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. “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 fl ow 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. In comparison to traditional CDs offered directly by financial institutions, the annual percentage yield (APY) is also quoted which represents the interest earned based on a simple interest calculation.

Liquidity Prior to Termination

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

Brokered CD prices, similar to those of other fixed income investments, respond to changing interest rate levels.

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.

Depending on market conditions, such as interest rate levels, the proceeds from the sale may be higher or lower than the price originally paid. 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. Brokered CD holders earn interest through the settlement date of the sale transaction.

To assist you in your financial planning, Raymond James includes brokered CD values on investors’ monthly statements. These values are estimated and the actual proceeds may differ if the CD is sold in the secondary market.

Investment charges are included in the offered price and quoted returns are based on 100% of the invested principal. If a CD is sold prior to maturity, a sales commission may be included in the sales price. Depending on the term of the CD, minimum investments may apply. Your financial advisor will provide you with this information prior to investing.

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.

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. 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 for callable CDs to trade at a premium because of the increasing possibility of a call at par.

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 and receive 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. A time-honored strategy is diversification – purchasing multiple CDs with different maturities.

Historical Returns of a Brokered CD Laddered Portfolio

“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 to reduce risk, improve yields, and provide reinvestment flexibility, while also accounting for liquidity concerns.

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.

Having one consolidated statement can be convenient, especially when it is time to prepare your tax return, giving you the opportunity to evaluate returns or risk. For CDs held in an investment account, future purchases are also made easy and can be accomplished with one simple telephone call.

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 is subject to the same limitations as those CDs that are purchased directly at a bank. No physical certificates are issued.

Please note that trade confirmations also act as evidence of your holdings.

CD Transfer Service

When you wish to move cash from matured CDs at local institutions to Raymond James, we offer our free and convenient CD Transfer Service. This eliminates the need for you to travel to the institution and convey the cash to Raymond James. Your brokerage statement will reflect the cash movement and investment in the new CD.

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.

Such features may include variable interest rates and variable terms, as some may be callable at the option of the bank. They can also be subject to transaction costs not typically associated with a traditional CD. Most important, brokered CDs offer liquidity prior to maturity as long as there is a secondary market 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 and are frequently associated with short-term money market instruments. 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 issuer has 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. What is the potential for loss if rates go up? 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.

We can provide complete information including current CD rates and terms including charges and expenses. Please ask for our CD Disclosure Document, which includes comprehensive information about the Brokered Certificates of Deposit program, as well as FDIC coverage under different ownership scenarios.

Please read the CD Disclosure Document (PDF) which covers the risks and rewards of investing in brokered CDs as well as discusses in detail the insurance coverage under different ownership scenarios.

For more information about CDs, please contact your Raymond James financial advisor or use the Office Locator to find an office convenient to you. For more resources, visit:

• The Federal Deposit Insurance Corporation’s website for details about federal deposit insurance at fdic.gov, and refer to the brochure titled FDIC Questions and Answers about your Insured Deposit. Or call the Information Center at 800-934-3342.
• U.S. Securities and Exchange Commission’s Certificates of Deposit: Tips for Investors at www.sec.gov/investor/pubs/certific.htm.
• The Securities Industry and Financial Markets Association's Certificates of Deposits page on 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 with an opportunity to initiate investment strategies which complement their 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 only limited maintenance.

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.

Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, FSB, member FDIC, a federally chartered savings bank. Unless otherwise specified, products purchased from or held at Raymond James & Associates are not insured by the FDIC, are not deposits or other obligations of Raymond James Bank, are not guaranteed by Raymond James Bank and are subject to investment risks, including possible loss of principal invested.

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