Last Updated Mar 11, 2011 12:06 PM EST
- The complexity will be designed in favor of the issuer.
- Retail investors will be attracted by some type of guaranteed downside protection.
- The cost of the protection will be excessive, though it's likely the buyer won't be able to figure that out.
- No institutional buyer would touch it, due to the excessive cost of the protection.
- There will be a more efficient way to accomplish the same objective.
- The CD is a debt instrument, and the principal is FDIC insured. The CD is linked to the Dow Jones UBS Commodity Index.
- The least the investor could receive is their principal back at the end of five years.
- The investor receives the return of the Dow Jones UBS each year, capped at 10 percent and with a floor of -20 percent. The investor receives the sum of the five years of returns, without compounding.
- You do not receive any of the return of the commodity index above 10 percent. Commodities are a very volatile asset class, so this cap is very important when evaluating the investment.
- There's no secondary market for the investment.
- The average total return for the portfolio was 36.0 percent. The average total return for the CD was 17.0 percent. In fact, the maximum return for the CD is a total return of 50.0 percent, and that could only occur if commodities went up at least 10% in each of the five years you owned the CD.
- There wasn't a single five-year period (out of 15 periods) when the CD would've outperformed the simple portfolio.
- There was only one period (again, out of 15) where the commodity index had negative returns for a five-year period, and the CD's principal protection would have protected the investor.
- Of the 19 years examined, the CD's cap came into effect 11 times. The CD's floor came into effect twice.
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