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Structured Certificates of Deposit: Introduction and Valuation

Financial Services Review, Vol. 23, No. 3, 219-237, 2014

22 Pages Posted: 1 Aug 2013 Last revised: 6 Nov 2016

Geng Deng

Wells Fargo

Tim Dulaney

Securities and Exchange Commission

Tim Husson

Securities and Exchange Commission

Craig J. McCann

Securities Litigation and Consulting Group

Date Written: July 30, 2013

Abstract

This paper examines the properties and valuation of market-linked certificates of deposit (structured CDs). Structured CDs are similar to structured products – debt securities with payoffs linked to market indexes – but while structured products have garnered significant interest in both the financial media and in the academic literature, structured CDs have received relatively little attention. We review the market for structured CDs in the United States and provide valuations for several common product types. Using our methodology, we find significant mispricing of several common types of structured CDs across multiple issuers, which is similar in magnitude to the well-documented mispricing in the structured products market. In particular, we estimate that structured CDs are typically worth approximately 93% of the value of a contemporaneously issued fixed-rate CD. These results suggest that unsophisticated investors may not understand the value, risks, and subtleties of these ostensibly conservative investments.

Keywords: Market-linked CDs, Certificate of Deposit, Equity-linked CDs, Derivatives, Structured Products, Valuation, Contingent Interest CDs, FDIC Insurance, Securities

JEL Classification: G21

Suggested Citation

Deng, Geng and Dulaney, Tim and Husson, Tim and McCann, Craig J., Structured Certificates of Deposit: Introduction and Valuation (July 30, 2013). Financial Services Review, Vol. 23, No. 3, 219-237, 2014. Available at SSRN: https://ssrn.com/abstract=2303718 or http://dx.doi.org/10.2139/ssrn.2303718

Geng Deng

Wells Fargo ( email )

1753 Pinnacle Dr
7th Floor
Mc Lean, VA Virginia 22102
United States

Tim Dulaney (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NW
Washington, DC 20549-1105
United States

Tim Husson

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC Washington, DC 20549
United States
202-551-6803 (Phone)

Craig McCann

Securities Litigation and Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States

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