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Review of Equity-Index CDs at Compass - Other Options?


Compass Bank is offering a special type of CD called the Power CD. It's only available through March 19, 2009. Here's the Compass promotion page describing the CD. The main features include:
  • 5-year term
  • 6.00% APY for each year during the term that the S&P 500 Index is equal or higher on an anniversary date, than the S&P 500 Index on the issue date. Otherwise, no interest will be paid for that year.
  • Principal is protected and insured up to FDIC limits
  • Payout of interest, if any, is paid out annually (no compounding)
  • $10,000 minimum deposit with additional $1,000 increments available
  • offer is only available through Thursday, March 19, 2009
There's an early withdrawal penalty, but there's no detail about how much. These types of CDs tend to have large early withdrawal penalties.

Some important small print of the promotion:
anticipated issue date of March 24, 2009, and is available through licensed representatives of Compass Brokerage, Inc., an affiliate of Compass Bank. Visit any BBVA Compass branch for more details.

It appears a branch visit is required. Compass Branches are located in Alabama, Arizona, Colorado, Florida, New Mexico, and Texas. Compass Bank is FDIC insured (FDIC Certificate # 19048).

Similar stock market CDs like this have been around for years. I first reported on them in this 2005 post. At that time EverBank and State Farm were offering stock market linked CDs, but they both have discontinued them.

If you keep the CD through the entire term, here are the approximate annualized returns for the six possible outcomes based on the S&P index performance:

S&P Index Annualized
Results CD Return
up 0/5 years 0.00%
up 1/5 years 1.20%
up 2/5 years 2.40%
up 3/5 years 3.60%
up 4/5 years 4.80%
up 5/5 years 6.00%

Build Your Own Stock Market CD

You can build your own stock market CD by splitting your funds between a CD and a S&P index mutual fund (or similar mutual fund). Here's an example:

Out of $10,000, $8,200 would be placed into a 4.00% 5-year CD (see rate summary) and $1,800 would be placed into the mutual fund. This would guarantee that you would get back $10,000 at the end of the 5 years even if the index fund falls to 0 (an extremely unlikely event). Here are some possible outcomes:

Cumulative Approximate
mutual fund yearly return
performance of 4% CD & fund
over 5 years over 5 years

-100% 0.00%
-50% 1.75%
0% 3.35%
50% 4.80%
100% 6.25%

The above approach also has advantages of lower taxes (long term capital gains tax for the mutual fund) and more upside potential. If you want to experiment with the numbers, this Bankrate interest calculator is a useful tool.
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Andy   |     |   Comment #1
If you consider an equity index CD, be sure and get really good details about how your interest is reported to the IRS each year. Some of these instruments have bad rules regarding this. I've seen some that report the 1099-INT as if you owned the STOCK for the year. You could find yourself paying a lot of income tax with no access to your money. It could be a very 'Anti-Roth' type investment.

Also, I'd triple check FDIC insurance charters if you buy one of these. Don't assume the bank you buy this from is the charter your insurance is under. These are often sold under the investment wings of banks and could be insured by another charter. Of course this is no problem unless you'd go over a limit.
Anonymous   |     |   Comment #2
Another issue that I can remember from some years ago is...if...the bank fails, and the time period to determine the index change has not lapsed, the FDIC considers NO interest has been earned. This is the worst case I think with these type of index related CD'

OC Steve
Anonymous   |     |   Comment #3
So, forget this then.
Anonymous   |     |   Comment #4
If someone is willing to "gamble" on the S&P going up (or not) in a given year, you may as well invest in some equities. When I saw this "deal" in the Sunday papera couple weeks ago, I thought "What's the point? This has to be the stupidest thing I've ever seen!" I still feel that way. Dumb. Avoid like the plague. I can't believe they wasted money advertising this thing; I've even got junk mail from Compass.
Anonymous   |     |   Comment #5
the S&P is at one of its lowest points. isnt it a reasonable bet it will be above its current point over the next 5 years?