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
Date Written: July 30, 2013
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: Suggested Citation