JPMorgan, SunTrust plan equity-linked CDs; stronger capital protection a boon for retail, advisor says

By Kenneth Lim

Boston, Oct. 1 - Issuers are offering a number of structured certificates of deposit as demand for stronger principal protection rises, an investment advisor noted.

"If you're looking for principal protection, it doesn't get much safer than a CD," the advisor said.

JPMorgan Chase Bank, NA plans to offer zero-coupon equity linked knock-out CDs due Oct. 29, 2010 linked to the Russell 2000 index.

If the underlying index never closes about 125% of the initial level during the life of the CDs, investors will receive par plus the index return at maturity. If the index has closed above the knock-out level during the life of the CDs, investors will receive par plus $25 per $1,000 CD.

SunTrust Bank is also offering structured CDs.

SunTrust plans to price zero-coupon CDs due Oct. 18, 2011 linked to the Deutsche Bank Balanced Currency Harvest (USD) index.

At maturity, investors will receive par plus the index return, subject to a maximum return cap of 60%.

SunTrust is also offering zero-coupon CDs due April 19, 2012 linked to the Dow Jones Industrial Average.

At maturity, investors will receive par plus an additional index amount, subject to a minimum total payout of 104% to 106% of par. The minimum payout will be set at pricing.

The additional index amount will be the averaged index return, calculated as the arithmetic average of the seven half-yearly closing levels of the index versus the initial index level.

CDs suit risk averse

Certificates of deposit can be attractive instruments for investors who want better yields than money markets but do not want to take on too much risk, the advisor said.

"There are investors now who, because of what's happening in the markets, find that some of the things they maybe used to invest in don't fit with their risk appetites anymore," the advisor said. "But if they structure their portfolios to be heavier on bonds and money markets and CDs, they're going to find that they'll enjoy lower yields. A plain two-year CD right now is offering somewhere around 4.25%, which is low when you consider dividend yields on some of the blue chips. But you have principal protection with CDs, so you don't have to worry about the price of a stock falling."

Structured CDs give investors the benefit of principal protection at the cost of some potential yield, the advisor said.

"Structured CDs give you the potential of getting a better yield on the investment because the returns are linked to assets like equities," the advisor said. "So you could get equity-like returns with principal protection. And the idea is that it's a better quality of principal protection than structured notes, because one is guaranteed by the issuer and the other is guaranteed by the FDIC. But if the underlying asset does not behave like you want it to, then you could lose on that interest, in which case your investment objective may not be met."

Risk appetite shrinking

The advisor said the market's general risk appetite has diminished in light of the current turmoil.

"I think CDs should become more popular," the advisor said. "Especially among retail investors, many of them are simply looking to get a better yield, and they're not really comfortable with products that are too complex or too risky. I can see how CDs with simple, easy-to-understand structures can fulfill those requirements. You know, outside of the U.S., structured CDs are very popular."

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