Low CD rates have forced people to look elsewhere for higher returns. Equity-linked certificates of deposit offer the potential for higher returns. The rate of return on these types of CD accounts are linked to the performance of a stock market index, like the S&P 500 or Dow Jones Industrial Average (DJIA).

Equity-linked CDs are also FDIC insured for up to $250,000, the same as regular bank certificates of deposit. Equity-linked CDs have been around for about 20 years and most big banks offer them as an investment. On the surface, these CD accounts seem very attractive. Your principal investment is 100 percent secure while you earn higher rates than what traditional CD accounts are offering these days.

Equity-Linked CDs Rate of Return is Different from the Rate of Return on the Index

There are pitfalls in investing in equity-linked CDs. The biggest pitfall is that the return you eventually earn on the account won’t be the same as the return on the index that the account is linked to.  For example, if the S&P 500 had an annual return of 10 percent for the next 5 years, you would think an S&P 500 equity-linked CD would also have a return of 10 percent each year.  Unfortunately, that isn’t the case because banks offering these types of CDs use a method of pricing the index on a certain number of days of the year. The closing index price on those days determines the rate that the investment receives, which makes the return lower than the actual annual return on the index.

How Do Banks Make Money from Offering Equity-Linked CDs?

Banks that offer these CDs need some way of making money off of them, and the money they earn is the difference in the rate of return in the index and the return the CD holder is paid. Many people are surprised to learn this after the fact just because the disclosures on these investments are rather long and complex. You can view an example from a JPMorgan Chase Bank disclosure supplement here: Equity-linked CD disclosure.

You might think you’re still interested in equity-linked CDs because the returns can be higher than traditional bank CD rates. You might also think this is a good way to earn more income by receiving higher interest payments. You will have to wait until maturity to receive any interest payments or dividend payments.

Early Withdrawal

Equity-linked CDs also have long terms, usually between 4 years and 6 years, which can be a problem for investors if they need their money sooner. With a traditional CD account, if an investor wanted access to some or all of their principal they would have to forfeit some or all of the interest earned.

With an equity-linked CD, if an investor wants access to principal they have to try and sell the CD account in the open market. Selling isn’t as easy as selling stocks because these investments are not traded on any exchange. You might find it impossible to sell an equity-linked CD before maturity.

Fees and Commissions

There are fees and commissions that have to also be paid by investors of equity-linked CDs. Below are the fees and commissions in the JPMorgan Chase Bank disclosure (link above).

J.P. Morgan Securities Inc., which we refer to as JPMSI, and its affiliates, will receive a fee of
$63.50 per $1,000 CD and will pay a portion of that fee to other dealers of $37.50 per $1,000 CD.
This commission includes projected profits that our affiliates expect to realize in connection with
hedging our obligations under the CDs. The commission of $37.50 per $1,000 principal amount
CD includes concessions to be allowed to selling dealers and concessions to be allowed to any
arranging dealer.

Before investing in equity-linked CDs, be sure to know what you’re getting into. Take the time to completely read the disclosures and fully understand them before you invest. A good place to start is this summary on equity-linked CDs by the Security and Exchange Commission (SEC).

You can use our rate tables to find the best traditional CD rates here: CDRates.MonitorBankRates.com.

If you’re like most Americans, chances are you will work past your retirement age. A recent Gallop poll showed three in four Americans believe they will work past their retirement age. The amount of people who believe they will continue working is almost equally split between having to work and wanting to work.

In the Gallup poll, 40 percent of those asked about working past their retirement age said they wanted to do so while 35 percent said they believe they will have to. Only 19 percent feel they will only work until their retirement age. The percentage of people who believe they won’t retire has declined since the last time the same poll was taken back in April 2011.

In April 2011, 44 percent of those polled believed they would work past retirement by choice and 36 percent said they would work out of necessity. Last month only 40 percent of respondents believe they would work past retirement by choice, while 35 percent said they would work out of necessity.

The drop in the number of Americans who believe they will still work when they hit retirement age isn’t a surprise. In April 2011 the housing market was still in the doldrums and housing prices were still declining. Whereas this year when the poll was taken, housing prices were showing the largest year over year gains since the peak of the housing bubble in 2006.

The unemployment rate for April 2011 was a lot higher than it was last month. The unemployment rate in April 2011 was at 9.00 percent, where as last month the unemployment rate as down to 7.5 percent. Consumers are more confident now then they were two year ago. The Conference Board’s Consumer Confidence Index is now at a 5 year high at 76.4 percent, back in April 20111 the index was lower at 65.4 percent.

The number of Americans who believe they will work full time into retirement age was at 18 percent in the April 2011 survey, in this past month’s survey the number fell to 15 percent. The number of Americans who believe they will work part time also declined, in April 2011 63 p0lled believe they would work part time, last month 61 percent believed they would work part time.

The number of respondents who believe they would stop working all together increased from 18 percent to 22 percent. Higher income Americans were also more willing to work into their retirement age. 49 percent of those earning $75,000 or more annually wanted to work past retirement.

The income people received in their retirement years has changed over the past several generations. Gone are the days where one could rely on a pension and Social Security income to have a comfortable retirement. The shift from pension plans to IRA accounts and 401K accounts over the past 30 years has left many Americans unable to retire just believe they haven’t saved enough to retire.

The boomer generation, Generation X and Generation Y all haven’t saved enough to retire. I recently wrote an article based on a Pew survey that showed a majority of Americans are not saving enough for retirement. You can read the article here: Are you Saving Enough for Retirement? According to a Pew Report, Probably Not.

Have you already retired and are stuck with low rates on your interest bearing investments? To help you find the best CD rates you can search our rate tables here: cdrates.monitorbankrates.com.

You can read the entire poll here: Gallup poll.

Initial jobless claims dropped more than expected, another hopeful sign that the labor market is indeed getting better and we might see higher CD rates sooner than expected. Higher CD rates depend on the Federal Open Market Committee increasing their key interest rate, the federal funds rate.

The federal funds rate was driven to record lows by the FOMC when the financial crisis hit and the deepest recession since the Great Depression followed. Average CD rates, savings rates, and money market rates all fell to record lows and remain at record lows. Right now the best CD rates on 1 year certificates of deposit are just above 1.00 percent, average 1 year rates are even less at 0.63 percent.

The FOMC has stated that they plan to keep the fed funds rate near zero percent until the unemployment rate falls below 6.5 percent. The Fed believes this will happen sometime in the late 2015 but I see signs that rates may increase sooner. Initial jobless claims for the week ending May 4th, were 323,000, down 4,000 from the prior week’s number.

The better than expected number of 323,000 sent long term bond yields higher as analysts were expecting a number around 340,000. The jobless claims number is the latest in a string of better than expected reports on employment released in 2013. The employment rate which was expected to increased 0.1 percent to 7.7 percent actually fell 0.1 percent to 7.5 percent in April.

The number of jobs created in April, 165,000, was higher than the 135,000 jobs analysts expected. The number of jobs created in the prior two months was also increased. The number of jobs created in February 2013 was increased from +268,000 to +332,000, and March’s number was increased to +88,000 to +138,000.

In addition to jobs numbers, there has also been better than expected reports in many other areas of the economy. Consumers are also feeling better about the future as the Conference Board Consumer Confidence number came in at 68.1 percent, higher than the expected number of 63 percent. Pending home sales which were expected to be flat actually increased 1.5 percent as the housing market continues to improve thanks to low mortgage rates and low home prices.

Over the past month there has been a few negative reports released that show an economy that isn’t running at full steam. ADP Employment Change for the month of April was expected to show a gain of 150,000 jobs but the number actually came in at 119,000. Factory orders for the month of March declined 4.0 percent, lower than minus 2.5 percent analysts had expected.

The biggest impediment to a robust economy, a lower unemployment rate, and higher interest rates are politics in Washington. Government spending cuts and higher tax rates are taking a bite out of economic growth. The latest battle coming is the debt ceiling we will hit sometime in 2013.

If Democrats and Republicans wait until the very last minute to increase the debt ceiling, investors will become very nervous about holding stocks and commodities. Another round of panic selling in these markets will send stocks, commodity prices, and bond yields lower (when bond prices rise, bond yields move lower). Although the troubles actually will start in the United States, investors will still by U.S. Bonds since that is the only place they feel 100 percent safe in during uncertain times – the classic flight to quality.

The Federal Reserve has been keeping the federal funds rate at near zero percent for over 5 years now. This policy has forced CD rates down to record low levels. The Federal Reserve has stated they plan to keep the fed funds rate at the current level until the unemployment rate falls below 6.5 percent, which the fed believes will happen sometime in the fourth quarter of 2015.

The Federal Open Market Committee had their two day meeting last week and released a statement on economic policy right after the end of the meeting on Friday. There were no surprises in the Fed’s meeting minutes on economic policy that would force CD rates higher before Q4 2015, but another report was released that might send rates higher sooner.

April’s Employment Situation Summary was released by the Department of Labor which showed the unemployment rate falling 0.1 percent from 7.6 percent to 7.5 percent. The unemployment rate at 7.5 percent puts the rate only 1 percent higher than the point at which the Fed will increase the fed funds rate. A higher fed funds rate will force bank CD rates higher.

In the first four months of 2013, the unemployment rate has fallen 0.4 percent, on average 0.1 percent a month. If the rate continues to fall 0.1 percent a month, the unemployment rate will reach the 6.5 percent in the second quarter of 2014, six quarters before the Fed believes the rate will reach that point.

Another big question is even if the rate hits 6.5 percent sometime in 2014, how much will the Fed increase the fed funds rate? To get back to a “neutral” level in that the fed funds rate neither stimulates nor dampen demand, the Fed will have to increase it to the 1.5 percent to 2 percent range, taking the current inflation rate into consideration.

Beside the unemployment rate, another factor that will determine how fast interest rates move is the rate of inflation. Many economists believe the Fed’s purchasing of $85 billion a month in mortgage-backed (MBS) securities and U.S. Treasuries coupled with a zero percent fed funds rate is already fueling inflation.

Much remains to be seen, but I believe rates on interest-bearing assets will move higher sometime in the first six months of 2014  instead of the predicted late 2015. For now, the best CD rates on 12 month certificates of deposit remain at 1.04 percent and 12 month Treasury yields this week remain at 0.11 percent.

There were no changes for the best CD rates available on our 1 year CD rate table this week though average CD rates did increase. The best CD rates available on our rate table remain at 1.04 percent with an APY of 1.05 percent and average 12 month CD rates increased from 0.60 percent to 0.68 percent.

The bank offering at 12 month rate of 1.04 percent with an APY of 1.05 percent is GE Capital Retail Bank. A rate just above 1.00 percent might not seem that great when compared to rates a few years ago but you’ll be hard pressed to find a better rate. With current 12 month U.S. Treasury yields much lower at 0.12 percent you really don’t have much of an option to earn a better rate without risking your principal.

Going out longer term on your fixed asset investments won’t earn you a much higher rate. The highest CD rates on 2 year certificates of deposit this week are at 1.19 percent with an APY of 1.20 percent. The bank offering that 2 year CD rate and CD yield on our table this week is CIT Bank. Average 2 year CD rates are also higher this week at 0.87 percent, up from last week’s average rate of 0.82 percent.

Think you’ll do better investing in 2 year U.S. Treasuries? Don’t count on it, 2 year Treasury yields are much lower at 0.24 percent, about one fifth the highest 2 year CD rates. If you want to get a higher yield on U.S. bonds you have invest in a 10 year bond to earn a higher rate. Current 10 year bond yields are at 1.72 percent.

Below are list of the highest CD rates on our rate tables this week along with U.S Treasury yields:

Highest CD Rates

• 1 Month CD Rate at 0.15% from Virtual Bank
• 2 Month CD Rate at .020% from E-Loan
• 3 Month CD Rate at  0.45% from Ever Bank
• 6 Month CD Rate at 0.88% from Doral Bank Direct
• 9 Month CD Rate at 0.92% from Doral Bank Direct
• 12 Month CD Rate at 1.04%/1.05% APY from GE Capital Retail Bank
• 18 Month CD Rate at 1.03%/1.03% APY from Doral Direct
• 24 Month CD Rate at 1.19%/1.20% APY from CIT Bank
• 30 Month CD Rate at 1.09%/1.10% APY from Discover Bank
• 36 Month CD Rate at 1.30%/1.31% APY from Virtual Bank
• 48 Month CD Rate at 1.55%/1.56% APY from Nationwide Bank
• 60 Month CD Rate at 1.69%/1.70% APY from Nationwide Bank

U.S. Treasury Rates

• 1 Month Rate 0.04%
• 3 Month Rate 0.05%
• 6 Month Rate 0.09%
• 1 Year Rate 0.12%
• 2 Year Rate 0.24%
• 3 Year Rate 0.35%
• 5 Year Rate 0.70%
• 7 Year Rate 1.13%
• 10 Year Rate 1.72%
• 20 Year Rate 2.50%
• 30 Year Rate 2.88%

CD rates are stable this week as equity markets and commodity markets move lower on concerns of slower growth. Average 1 year bank CD rates are at 0.60%, down from last week’s average 1 year CD rate of 0.63 percent. The best CD rates on in our 1 year certificates of deposit remain unchanged this week. The best rates in database are from GE Capital Retail Bank at 1.04 percent with an APY of 1.05 percent.

3 month CD interest rates are averaging 0.30 percent, unchanged from last week’s average 3 month rate. The highest 3 month CD rates in our database this week are from Ever Bank at 0.56 percent. Ever Bank also topped our 3 month list last week with the same rate. The second highest CD rates in our 3 month database of rates this week are from E-Loan at 0.50 percent.

6 month CD rates are averaging 0.34 percent, down from last week’s average rate of 0.35 percent. The best CD rates in our 6 month certificate of deposit database are more than double the average rate. The bank offering the best rate is Doral Bank Direct at 0.88 percent. The second best rate in our database is from Discover Bank at 0.75 percent.

The current national average 24 month CD rate is at 0.82 percent, down from last week’s average of 0.84 percent. The highest 24 month CD rates at banks in our database are from CIT Bank at 1.19 percent with an APY of 1.20 percent. The second best rate in our database is from Virtual Bank at 1.15 percent with an APY of 1.20 percent.

Average 5 year CD rates this week are at 1.18 percent, down considerably from last week’s average 5 year CD rate of 1.27 percent. The best 5 year CD rates in our database are from Nationwide Bank at 1.69 percent with an APY of 1.70 percent. The second highest 60 month rate in our database is from The National Republic Bank of Chicago at 1.65 percent with an APY of 1.66 percent.

Average CD rates held steady this week as long term bond yields declined on a negative unemployment report for March. Average 12 month CD rates are at 0.63 percent this week, unchanged from last week’s average CD rate. The best CD rates on our rate list also remained unchanged this week at 1.04 percent with an APY of 1.05 percent. 10 year bond yields fell from last week’s high of 1.86 percent down to 1.68 percent Friday afternoon.

The Unemployment Report released last Friday showed non-farm payrolls only increasing by 88,000 jobs in March, which is much lower than the prior two months’ job numbers which were revised higher. The change in total non-farm payroll employment for January was revised from +119,000 to +148,000, and the change for February was revised from +236,000 to +268,000. The March number of 88,000 jobs will probably be revised higher as well in next month’s report.

Short term CD rates also remained unchanged this week. Average 3 month bank CD rates this week are at 0.21 percent, unchanged from last week’s average 3 month rate. The highest CD rates on 3 month certificates of deposit are at 0.46 percent, unchanged from last week’s highest rate. Average 6 month CD rates are at 0.34 percent, no change from last week. The best 6 month CD rates available also are unchanged at 0.88 percent.

Average 2 year bank CD rates fell to 0.64 percent this week, down from last week’s average 2 year rate of 0.65 percent. While average 2 year rates fell one basis point, the highest CD rates available on 2 year CDs remain unchanged. The highest 2 year rates on our rate list this week are at 1.15 percent with an APY of 1.16 percent, unchanged from last week’s rate.

5 year CD interest rates were actually higher this week over last.  The average 5 year CD rate is at 1.25 percent, up from last week’s average 5 year rate of 1.21 percent. The best 5 year rates on our rate table this week are from Nationwide Bank at 1.69 percent with an APY of 1.70 percent. Just a few years ago, the highest 6 month rates were just below 2.00 percent. Now you have to invest in a 10 year certificate of deposit from Discover Bank to earn a rate of 1.98 percent with an APY of 2.00 percent.

Below are lists of the highest certificate of deposit rates this week:

• 1 Month Rate/APY Lone Star Bank 0.15%/0.15%
• 3 Month Rate/APY Ever Bank 0.45%/ 0.45%
• 6 Month Rate/APY Doral Direct 0.88%/0.88%
• 12 Month Rate/APY GE Capital Retail Bank 1.04%/1.05%
• 18 Month Rate/APY Salem Five 1.14%/1.15%
• 24 Month Rate/APY Virtual Bank 1.15%/1.16%
• 30 Month Rate/APY Discover Bank 1.09%/1.10%
• 36 Month Rate/APY The National Republic Bank of Chicago 1.35%/1.36%
• 48 Month Rate/APY Nationwide Bank 1.55%/1.56%
• 60 Month Rate/APY The National Republic Bank of Chicago 1.85%/1.87%