What is a Market Linked Certificate of Deposit?

by Investing School on January 31, 2011

A “Market Linked Certificate Of Deposit” (MLCD) is similar to traditional Certificates of Deposit (CDs), however they are not tied to a set interest rate. On the contrary, the MLCD’s returns are linked with a major investment index, which could include stock markets, currencies, commodities, or other financial options.

MLCDs are insured by the FDIC, and on the positive side, if the linked index has dropped at the maturity date, the investor receives the principal refunded. This is a very big advantage for those holding MLCDs! However, this is only in effect if the MLCD is held until the maturity date. In addition to this insurance, the MLCD is closed for the duration of its maturity, and that keeps investors from messing around with it by buying and selling!

It is also important to recognize the shortcomings of MLCDs, such as penalties for early withdrawal and significantly higher tax rates. In addition, any returns generated by the MLCD must be reported as income each and every year, even though you cannot access those funds immediately! Some MLCDs will also place an upper limitation on the returns that can be received, so that is certainly worth anticipating such a situation.

Remember that if the linked market goes down, then while there is no loss, there is also no return on the MLCD as there would be on a traditional CD purchased over the same period of time. On the other hand, if the linked index goes up significantly, then the returns could dwarf those of a traditional CD.

Here are more thoughts on Market Linked Certificate of Deposit at MoneyNing.com

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