Harris, JPMorgan offer structured CDs; safer investments gain traction among investors, advisor says

By Kenneth Lim

Boston, Aug. 6 - A number of structured certificates of deposit were launched on Tuesday, and the instruments are catching on with investors concerned about risk, an investment advisor said.

Harris NA plans to price callable leveraged curve steepener certificates of deposit due Aug. 18, 2023.

The CDs, which pay interest quarterly, will accrue interest at 10% annually for the first year. After that, interest will be 10 times the 30-year constant maturity swap rate over the two-year CMS rate, capped at 12% per year.

Beginning Aug. 18, 2009, the CDs will be callable at par on any interest payment date. If the CDs are not called, the payout at maturity will be par.

JPMorgan links to S&P 500

JPMorgan Chase & Co. is offering zero-coupon principal-protected dual directional knockout CDs due Aug. 28, 2009 linked to the S&P 500 index.

If the index never closes more than 13% to 15% above or below its initial level, the payout at maturity will be par plus at least 100% of the absolute value of the index return. The exact knock-out levels will be set at pricing. The maximum return will be at least 13%, or $130 per $1,000 CD, with the exact cap to be set at pricing. Otherwise, investors will receive par.

The bank is also offering a second series of CDs due Feb. 26, 2010 linked to the S&P 500 Index with a similar structure.

The longer-dated CDs have upper and lower barriers of 21% to 23% of its initial level. The maximum return will be at least 21%, or $210 per $1,000 CD, with the exact cap to be set at pricing. Otherwise, investors will receive par.

CDs offer peace of mind

Compared to the more typical note structure, CDs offer investors a more secure investment, an investment advisor said.

"CDs are FDIC insured, so you have the government backing your money," the advisor said. "Notes are backed by the credit of the bank that's issuing them, and I think it's become very clear this year that contrary to popular opinion not too long ago, that banks today are still quite capable of collapsing."

The advisor said the attractiveness of CDs has increased as banks' credit ratings have deteriorated.

"I think there's definitely more interest in them now," the advisor said. "CDs now are a little like the notes that were being offered two years ago when banks were still considered relatively low-risk."

"CDs appeal to investors who want to reduce or limit their risk exposure," said the advisor, who uses a number of CDs for clients. "Because it's FDIC insured, it allows you to buy a product from an issuer without breaching your limit, because you're not exposed to the issuer's credit. So it gives investors some flexibility."

Investors give up some returns

The advisor said investors generally receive lower potential returns with CDs.

"Especially now, when spreads are wider, a note can offer pretty attractive terms," the advisor said. "A CD can't offer as much, but again, that's because you're taking on less risk."

The advisor pointed to a dual directional note by UBS AG linked also linked to the S&P 500 index as a comparison.

The UBS note, which is due Aug. 28, 2009, will have upper and lower barriers of 16% to 18% above or below its initial level. Like the JPMorgan product, the participation rate will also be one.

"I guess in a way there's a spread of about 300 basis points between the two products," the advisor said. "So that gives you an idea of what it costs the investor to buy a CD."

But the advisor said the cost is sometimes sensible.

"You're talking about a difference of 300 basis points over one year," the advisor said. "I mean, it really depends on the individual, but some people don't mind taking 13% as opposed to 16%, because 13% is still well above money-market rates. Plus you know it's virtually guaranteed that you'll get your money back."

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