CERTIFICATES of DEPOSIT

OVERVIEW     
Floating Rate & Contingent Interest CDs are FDIC insured and are purchased at FISN, a brokerage firm. FISN searches nationwide for the best Floating Rate & Contingent Interest CDs and offers these certificates of deposit for investment. The bank pays interest at a variable rate for Floating Rate CDs or at a fixed rate when certain conditions are met for Contingent Interest CDs. In either case, the bank computes the interest earned for each period based upon the specific terms of each CD. Some Floating Rate & Contingent Interest CDs are callable. Only the bank has the right to call a CD and return the funds early. FDIC insured banks and brokerage firms team-up to distribute insured CDs across the nation. FISN has access to the widest inventory from all major Wall Street firms. Investors select CDs that meet their needs for safety, yield and return of principal. The CD is held in a brokerage account.

PROCESS       
Investors start by selecting suitable CD investments and then open a standard brokerage account in their name at the brokerage division of FISN, First Internet Securities Network. A brokerage account can hold many CDs of any type, without limit. The investor wires funds or sends a check to fund this new account. FISN sends new account paperwork and purchase confirmations to the investor. The brokerage forms are completed and the transaction confirmation is verified. Only one account needs to be opened for each ownership category. Paperwork is returned to FISN along with the required identification.

FDIC COVERAGE         
Floating Rate & Contingent Interest CDs are purchased in amounts starting at $25,000. No more than the $250,000 insurance limit per ownership category should be invested in any one bank at the same time. There is no limit on the number of banks per brokerage account and multiple brokerage accounts can be opened for other ownership categories such as IRA, joint or trust accounts. FISN understands the FDIC insurance rules and helps depositors gain the best return by maximizing coverage. FDIC coverage for retirement accounts is $250,000 per bank.

FLOATING RATE & CONTINGENT INTEREST CD FEATURES
Floating CDs pay interest at a variable rate over the life of the CD. The interest rate is often fixed for the initial period. Thereafter, the variable rate could be fixed for each period based upon a formula or the variable rate could be re-calculated as often as every day based upon a formula. The effective rate for the period is often determined at the end of the period. Each CD has its own unique terms that establish the formula.

Interest is paid on a monthly, quarterly or semi-annual basis into the brokerage account, where it can continue to earn interest in a money market fund account. It is possible that no interest might be earned in a period, if the formula indicates it, or the effective rate may be capped on the upside at a certain percentage. Investors are advised to study the Terms & Conditions of each offering and the Disclosure documents carefully in order to fully understand floating formulas, contingency terms and other features. Disclosures should be retained for future reference.

Floating Rate CDs can be callable, often at the end of each period, which usually is semi-annually. Key information is the bank issuer, interest rate formula including the name of the index, the source of the index and where it is available to view, frequency of the adjustment, floors or caps, call dates and the maturity date.

Contingent Interest CDs have a fixed rate of interest that is earned based upon satisfying certain conditions; the payment is contingent on these conditions. The interest rate is often fixed for an initial period. Thereafter, the conditions determine when interest is accrued and when it is not. The contingent calculation is often determined each day and interest is accrued daily until the end of the period. Each CD has its own unique terms that establish the formula.

Interest is paid on a monthly, quarterly or semi-annual basis into the brokerage account where it can continue to earn interest in a money market fund account. It is possible that no interest might be earned in a period if the formula accrues no daily interest because the conditions were never satisfied. Investors are advised to study the Terms & Conditions of each offering and the Disclosure documents carefully in order to fully understand the Contingent Interest formulas and other features. Disclosures should be retained for future reference. 

Contingent Interest CDs can be callable, often at the end of each period, or semi-annually after an initial no call period. Key information is the bank issuer, contingent interest formula including the name of the index, the source of the index and where it is available to view, frequency of the adjustment, floors or caps, call dates and the maturity date.

See Brochure on Structured CD Investment linked to Interest Rates, LIBOR and Inflation Indexes

See Federal Reserve Statistical Release on Selected Interest Rates (Daily)

See Interactive LIBOR Rate Graphs over the past ten years or an Historic Chart of LIBOR by month for the last ten years
 

CALLABLE CD FEATURES 
Floating Rate & Contingent Interest CDs, if callable, have an initial non-callable term followed by a callable term. The interest rate is established for each Floating Rate period according to the Floating Rate terms, or, the fixed rate is earned based upon satisfying the conditions of the Contingent Interest terms, which cannot change during any period regardless of call provisions. The interest is paid into the brokerage account where it can continue to earn interest in a money market fund account.  At the end of the non-callable period, the CDs may be called for the full amount of the deposit. When called, the bank returns the deposit amount to the brokerage account with full interest to date. If not called, the CD remains callable, usually every 6 months. Only the issuing bank of each CD can make the call decision, not the depositor or the broker. The CD will continue to pay interest for the full, possible CD term if it is never called. Key information is the name of the bank, the first call date, subsequent call dates and the final stated maturity at the end of the possible term.

Interest can be disbursed immediately or periodically via checks or electronic funds transmission straight to your local bank. Available cash also can be withdrawn from the account via checks, automatic teller machines or debit card. There may be fees for accounts with ATM or debit cards.

See Which CD Is Right for You?

ID REQUIREMENTS
Brokerage accounts are opened at FISN’s brokerage division, First Internet Securities Network. Securities in FISN accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. FISN is required under U.S. government rules to verify ownership of all accounts. Individuals are required to provide a copy of a valid government issued, photo identification. Business accounts, trusts and other non-individual accounts have special requirements. Some banks exclude residents of certain states from the purchase of their CDs, otherwise, there are no limits and plenty of unrestricted product is available.

FEES
There are no placement fees paid by the investor. Banks pay brokers to distribute their CDs. New issue CDs are sold at par or a price of 100.0 to the investor. Par is the face amount of the CD on which interest is earned. Some CDs may require minimum purchase amounts.

Current Product Disclosure

The above disclosure is typical for this type of issue. Actual disclosures are published for each new issue in most cases. Look for the related disclosure for each deal on the FISN web site or ask your FISN Registered Representative to send it to you. Current disclosures are made available to purchasers for new issues either by mail or online after the trade date or settlement date. Disclosures for secondary issues were publish at the time of the original settlement and may not be available or up-to-date.

UNIQUE RISKS FOR FLOATING RATE & CONTINGENT INTEREST CDs
Floating Rate & Contingent Interest CDs present unique risks related to the rate adjustment features. Floating Rate CDs will pay an initial rate of interest for a definite period and will “float" to an adjusted rate thereafter. 

Floating Rate CDs have a formula based upon widely used indexes that determined the rate and the timing of any change. 

Contingent Interest CDs have a fixed rate that is earned based upon satisfying certain conditions. The payment is contingent on these conditions.

The risk is that the floating rate may be above prevailing market rates or the contingent conditions are better than current offerings. If the terms are better than the current market and the CD is callable, the underlying CD becomes subject to Call Risk since the bank is motivated to replace the deposit with less costly funds. Reinvestment Risk arises when CDs are called, causing investors to relinquish a high rate or better terms and replace it with a lower current market rate or less attractive terms.

The initial rate in a floating rate CD or the fixed rate in a contingent CD is not the yield to maturity (YTM). The YTM on these CDs will depend upon when the CD is redeemed and how terms impacted actual interest payments and can only be determined after maturity.

MARKET RISK
All investments including certificates of deposit (CDs) held in a securities account are subject to market risk. Market risk is always present but is immaterial if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. This risk arises from the valuation that potential buyers in the market put on an investment that could be offered for sale. The potential risk is that the value may fall and transaction cost may be incurred if the item is put up for sale. This risk could become a real loss if holdings are actually sold.

Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. It is possible that the value may rise as well and then it would be a market value gain. Market risk is an overall risk caused many factors such as interest rate movements, transaction cost and availability of purchasers.

INTEREST RATE RISK
All investments that pay interest or dividends are subject to interest rate risk. Certificates of deposit (CDs) are included since their primary purpose is to produce income in the form of interest. Interest rate risk is present if interest rates are moving up from their original level but is immaterial if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. The rule is simple: if rates rise, the “market” value will fall.

All purchasers in the secondary market demand the yield on previously issued CDs be increased to current levels before they buy them. Yields are increased by reducing the price. This risk could become a real loss if holdings are actually sold. Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Of course, the value may rise if interest rates fall and then it would be a market value gain if sold.

SECONDARY MARKET AVAILABILITY RISK
All investments are subject to the availability of a secondary market. Income producing investments including certificates of deposit (CDs) are included, particularly since they don’t trade such as stocks do on an established “stock market”. The risk is the availability of such an organized and active place to sell your investment. This risk is present if you plan to sell your investment but is immaterial if CDs are held to maturity. Most CDs are purchased with the intention of holding them to maturity. FISN, though not obligated to do so, may maintain a secondary market in CDs after any initial distribution. Simply stated - buyers are needed to sell something. This risk could become a real loss if holdings are actually sold.

Market values are estimated on FISN monthly statements. Current market values can be requested from your FISN Investment Manager. Relative values may rise if more buyers are present and can be reached in a timely and effective fashion.

CALL RISK
Callable investments including, callable CDs, are subject to call risk. Depositors should clearly understand all the call provisions of the CD. This risk is present even if you plan to hold CD investments until maturity. The bank can “call” or redeem a CD on certain call dates prior to maturity. The bank calls the entire issue regardless of the holder. When called, the bank returns the full deposited amount with interest up to the call date. Only the bank can exercise a call, not the account holder or the broker. Banks usually call a CD when rates have fallen and they can replace the deposit at a lower rate.

The risk is that, even though you get back your full deposit, when you go to reinvest your funds, it will earn a lower rate. Calls cannot be predicted; banks consider only their own needs and costs. Call risk is difficult to evaluate for monthly statements. It is better estimated by requesting your FISN Investment Manager to seek out potential buyers for the actual investment position.

RE-INVESTMENT RISK
All fixed income investments are subject to re-investment risk. This risk is related to what you do when an investment ends, regardless of the reason. If you plan to continue investing, you have to re-enter the marketplace to find a new, replacement investment. One side of this “risk” is that rates may be lower and/or fewer products are available; the other side of this “risk” is that rates may be higher and more products are available.

Strategies to lessen this risk are to time investment maturities close to when you might need back the money or to go long when rates appear high and to go short term when rates appear low. Some investors do both by laddering the maturities between long and short terms. Longer term CDs capture higher returns offered by longer investments. Shorter maturities keep the remainder of your funds regularly available so rate swings are not missed.

PRINCIPAL RISK
All investments are subject to principal risk, which is connected to the issuer. If the financial outlook of issuer declines, the issuer’s credit rating could be downgraded or the issuer could actually default on its debt.

With most debt, if the issuer is less credit worthy, the debt security will fall in value. And, if the issuer cannot repay the debt at all, the investment may become worthless. The principal value will diminish in either case.

With FDIC insured CD investments these two risks are nearly non-existent. Most banks, particularly regional banks, are not rated but even if they were, it typically does not matter because the FDIC stands behind the bank. In a default, the FDIC is still there, protecting depositors. When a bank fails the FDIC usually transfers deposits to a viable bank or simply returns the deposit. Both actions occur promptly as is required in the FDIC rules. This risk is avoided by following the FDIC deposit insurance rules and staying insured.