All of the following statements on the secondary market of Brokered CDs are INCORRECT EXCEPT

(C) The RR should inform the client that the execution has already taken place and the stock is currently owned by the client at $51 per share, so further action will require further instruction.
(D) The RR should mark the transaction as an error and cancel the original trade in the client's account.

Certificates of deposit (CDs) are time deposits. When you choose a CD, the bank accepts your deposit for a fixed term—usually a preset period from six months to five years—and pays you interest until maturity. At the end of the term you can cash in your CD for the principal plus the interest you've earned, or roll your account balance over to a new CD. But you must tell the bank what you've decided before the CD matures. Otherwise the bank may automatically roll over your CD to a new CD with the same term at the current interest rate. And you might earn a better interest rate with a CD that has a different term, or one offered by a different bank.

CDs are less liquid than savings accounts. You can't add to or withdraw from them during the term. Instead, to buy a CD, you need to deposit the full amount all at once. If you cash in your CD before it matures, you'll usually pay a penalty, typically forfeiting some of the interest you've earned. To make up for the inconvenience of tying up your money, CDs typically pay higher interest than savings or money market accounts at the same bank, with the highest rates for the longest terms—though there are exceptions to this pattern. Like other savings accounts, bank CDs are insured by the FDIC, with your CD account balances counting toward your total insured amount.

CDs for Different Interest Rate Environments

In the past, each CD paid a fixed rate of interest over its term. But today you can also find variable rate CDs, sometimes called market rate CDs. With these accounts, the interest rate may rise and fall with changing market rates or be readjusted on a specific schedule. If the current rate is low, it may make sense to purchase a variable CD. That way, if interest rates rise, you won't miss out on the rate increase. On the other hand, if you expect rates to fall in the future, it may make more sense to buy a fixed-rate CD to lock in the higher rate for a specific term.

Another alternative is to create a CD ladder. You might start by dividing the amount you plan to invest in CDs into four equal amounts and buy four CDs with varying terms—say three months, six months, nine months, and one year. As each CD matures, you replace it with a one-year CD, so you have an amount to cash in or reinvest on a regular schedule. If you used a longer ladder, so that your CDs matured on an annual instead of a quarterly basis, you would never have all your money invested at the same rate, which would allow you to avoid locking in a large sum at a low rate.

Take Care With Long-Term CDs and Call Features

CDs are usually described, quite accurately, as conservative investments because of their FDIC insurance and relatively short terms. However, not all CDs are alike. In addition to regular CDs, whose terms are rarely longer than five years, banks may offer long-term, high-yield CDs that pay a much higher rate of interest for terms as long as 10 or 20 years. These CDs may be callable, which means that the bank has the right to terminate the CD and pay you back your principal plus the interest earned to that point. This usually happens if your CD is paying higher interest than CDs currently on the market, and it means you would have to reinvest your principal at a lower rate than your old one paid. However, unlike the bank, you don't have the right to end a CD contract if the situation is reversed and your CD is paying less than the current market rates.

In fact, you may want to think twice about any long-term CD because of the early withdrawal penalty. Generally speaking, investments that cost you money simply for changing your mind are rarely the best alternative.

Brokered CDs—Not Always FDIC Insured

You may also be offered a brokered CD by a stockbroker or other investment professional who serves as a deposit broker for the issuing bank. Brokered CDs may have a longer holding period than a CD you purchase directly from a bank, and they may be more complex and carry more risk. Although most brokered CDs are bank products, some may be securities—and won't be FDIC insured.

Brokered CDs differ in other ways from traditional CDs. For example, you may have to pay a fee to buy a brokered CD, either as a fixed amount or as a percentage of the amount you are investing. If the fee is modest and the CD is paying a higher rate than you could find on your own, you may come out ahead. But you should take the fee into account. You may also have to invest a minimum amount, such as $10,000 or more.

If the bank issuing the CD is FDIC-insured and if the CD is a bank product, your account value should be insured for up to $250,000. Keep these two things in mind, though: To be eligible for insurance, you must be listed as the CD's owner, so you'll want to confirm that it's registered to you or held in your name by a custodian or trustee (for more details on properly titling your CD, see the FDIC's Consumer News, When a Broker Offers a Bank CD: It Pays to Do Some Research). Second, if the issuer happens to be a bank where you already have money on deposit, the total value of your accounts could be higher than the amount of the insurance. If the bank fails, you might be vulnerable to loss.

Unlike a traditional CD, brokered CDs can't simply be cashed in with the issuing bank. As a result, some firms that offer brokered CDs may maintain a secondary market—but these secondary markets tend to be quite limited. If you want or need to liquidate your brokered CD before maturity, you may be subject to what's known as market risk. This means the CD may be worth less than the amount you invested because other investors are not willing to pay full price to own it. This might happen if the interest rate that new CDs are paying is higher than the rate on your CD.

Questions to Ask About CDs

Before you buy any CD, you should ask several questions:

• What interest rate does the CD pay and what is the annual percentage yield (APY)?
• Is the rate fixed or variable, and if it's variable, what triggers an adjustment and when does the change occur?
• When does the CD mature?
• What's the penalty for early withdrawal and are there exceptions to the early withdrawal fee?
• Does the bank have the right to call the CD, and if so, when could that occur?
• Is the issuing bank FDIC insured?

And if you purchase a brokered CD through a deposit broker, you should also ask the following additional questions:

• Is the brokered CD a bank product or a security?
• What is the name of the issuing bank?
• Is the issuing bank insured by the FDIC?
• Is the deposit broker someone you know—whose credentials you have checked?

CDs are useful additions to most investment portfolios because they offer safety and a predictable return. If you keep a portion of your assets in cash, CDs or U.S. Treasury bills are usually the most logical choices. And if you've been accumulating money to pay for specific goals, such as making the down payment on a home or paying tuition bills, you may want move some of this money into CDs as the date you'll need the money gets closer. That way, you can be sure you'll have it when you need it.

Step-up CDs
Step-up CDs offer coupon rates that increase based on a predetermined schedule. The initial interest rate may be lower than the interest rate paid on comparable fixed-rate CDs. However, the consequent increase in coupon payments may result in a higher overall return at maturity. Step-up CDs are generally issued with a call feature, which is at the option of the bank, with the step-up schedule coinciding with the call schedule. If CDs are not called, the coupon rates will step up to the next predetermined level. The step rate may be below or above then-prevailing market rates.

Floating-rate CDs
Floating-rate CDs adjust their coupon payments by a predefined percentage, or spread, over the reference rate, such as the Consumer Price Index (CPI). The rate of return on a floating-rate CD will depend on changes to its reference rate. Consequently, the initial rate cannot be used to calculate the yield to maturity.

It is important to compare the risks and benefits of each investment alternative to determine which is most appropriate, based on portfolio objectives.

FDIC protection
All CDs offered through Raymond James are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 for all deposits held in the same capacity at one bank. Insurance limits are determined based on account ownership category.

Additional Insurance Protection
Raymond James offers brokered CDs from multiple financial institutions across the country. By purchasing CDs from several banks, an investor can easily keep the entire CD portfolio insured even if it exceeds $250,000.

Keeping track of insurance limits As an investor, it is important to track total deposits – CDs, checking, savings, trust and money market deposit accounts – to ensure they do not exceed the FDIC insurance limit of $250,000 at any one bank.

Banks often have similar names, so check each bank's FDIC certificate number, which identifies each bank as a separate institution. FDIC certificate numbers are available at fdic.gov. A detailed explanation of insurance limits is also available at fdic.gov or by phone at 877.ASK.FDIC (877.275.3342).

FDIC insurance does not protect against market losses due to selling CDs in the secondary market prior to maturity.The premium value of secondary buys is not insured. Insurance is only for par value plus accrued interest up to $250,000.

Need for specific return There are several yield calculations to consider when evaluating a brokered CD. These yields are based on the coupon rate, the purchase price and the number of years until the CD's maturity or call date. Interest income from CDs is generally subject to income tax.

Yield to Maturity (YTM) represents the return an investor will receive if a CD is held to term. Annual Percentage Yield (APY) is also quoted and represents the return earned based on a simple interest calculation that includes the effect of compounding. Yield to Call (YTC) is the return earned if a CD is called prior to maturity. Current Yield (CY) measures the immediate return based on the CD's annual cash flow and its purchase price.

Since CDs may have multiple redemption scenarios (e.g., at maturity, by call or sale prior to maturity), the lowest of the YTM or YTC is quoted to the investor at the time of purchase.

Liquidity and interest rate sensitivity Raymond James and other broker/dealers, though not obligated to do so, may maintain a secondary market in brokered CDs. The secondary market may be limited and may be discontinued at any time without notice. CDs are intended to be held until maturity, as this assures redemption at par value. Investors may sell them before the stated maturity date, if needed, at prevailing market prices, and proceeds may be more or less than the original investment. Sales charges may apply.

However, there is no assurance that investors will be able to liquidate prior to maturity if a secondary market no longer exists. As with bonds, CD prices move opposite to interest rates, increasing when rates decline and falling when rates increase. Market values of longer-term CDs tend to be more sensitive to interest rate fluctuations. Thus, longer-term CDs are generally not suitable for investors with a short-term horizon. Other factors that may affect CD prices are order size, call features and investor demand.

Brokered CDs provide a reliable source of income and are protected by FDIC insurance.

How interest rates affect bond values

This chart is for illustrative purposes only and is not indicative of any actual investment.

In the event that a financial institution becomes insolvent, one of three things may occur: Another institution may acquire the insolvent bank and keep the original CD terms, another institution may acquire the insolvent bank and set a new interest rate1, or the bank will be closed and FDIC will make payments on insured deposits. Investors’ access to funds will temporarily be limited and the investors will receive up to $250,000 for principal and interest accrued to the date the issuer is closed. Any unearned interest will not be paid. In these instances, Raymond James will submit the paper- work for you. Additionally, an investor may face reinvestment risk.

Banks additional prepayment option
In rare instances, an issuing bank may decide to prepay a CD's interest in full through the original maturity date. In an instance where prepayment occurs, investors would receive all interest payments and principal balance prior to the stated maturity of the issue. Both non-callable and callable CDs can be prepaid. While prepayment occurs infrequently, it is a possibility. The primary risk involved with prepayment is that it may increase the investor's tax burden in the year the prepayment occurs.

1 If the institution changes the interest rate on a CD after acquisition, it must offer an optional redemption at par.

In most market conditions, long-term CDs offer higher yields than short-term CDs. By investing in short-term CDs, an investor has the ability to reinvest funds as rates go up, but will typically earn a lower rate of return associated with short maturities.

In contrast, generally long-term CDs offer higher rates, which, over their lifetimes, may or may not keep up with inflation or rising interest rates and, thus, may or may not provide the highest possible rate of return.

By “laddering maturities,”* investors can take advantage of reinvestment opportunities while potentially earning a higher overall return. A laddered CD portfolio is structured by purchasing several CDs with consecutive maturities. As each CD matures, the proceeds are reinvested in a new CD that has the next longest term on the ladder.

Although it is impossible to control or predict future interest rates, investors’ financial security may depend on the successful management of interest rates.

When investors purchase brokered CDs through Raymond James, they gain the convenience of recordkeeping. With consolidated recordkeeping, it’s easy to keep track of FDIC insurance limits. Combined statements mean less paperwork at tax time.

Brokered CDs are issued by banks via a “master CD” to deposit brokers who, in turn, offer interest in the master CD to individual investors. CDs are offered in electronic form without an actual certificate. All securities are held at the firm and are included on one monthly statement.

Investors should understand when the CD matures, how often it pays interest and how much interest it pays. Find out if the issuer has the right to call or redeem the CD prior to maturity. Compare the yields quoted versus those of non-callable alternatives. Understand secondary market liquidity in case it is necessary to cash out prior to maturity. Investors should check all their existing deposits at that bank prior to purchasing its CD so they won't exceed FDIC insurance limits. Finally, consider all risks and benefits and how this investment alternative may help meet investment objectives. Remember, brokered CDs may not be suitable for everyone.

Resources

* Should interest rates remain unchanged, increase, or even decline, a laddered approach may help reduce risk, improve yields, provide reinvestment flexibility, and provide shorter-term liquidity. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and durations.

The information contained herein has been prepared from sources believed reliable but is not guaranteed by Raymond James & Associates, Inc. and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users or members.

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