The Fed Taper and its effects on longer term structured Callable CDs

An advisor has requested my opinion on a Step-Up Callable CD, which I was keen to consider as it relates well to two of our recent discussions on tapering and callable notes. There is no link to the CD we are analyzing as they are not filed in a similar fashion to structured notes.

Why are we interested?

Structured CDs have become very popular over the last few years. While there is no effective way to tally the annual notional issuance of Structured CDs, I have heard estimates of $25 – $40 billion– a large segment of the market worth exploring. Driving this growth are two dynamics: 1) investors pulling back from risk and 2) the low interest rate environment. Theoretically in a Structured CD, the CD component addresses risk concerns while the structuring enables an increase in yields. However, as I have discussed previously, a callable feature can often be a costly element for an investor — and structures that make use of them often aren’t as attractive as they appear at first. In today’s Deconstructed Notes, I will revisit the question of whether the extra initial yield paid by the issuer in exchange for the call provision is worth it.


Will the Fed Taper? Interesting strategies to take advantage of a yield increase

Given all the attention on whether (or when) the Fed will taper, we found two notes that should generate positive returns if (when) tapering begins.

Why are we interested?

The “conventional wisdom” is that rates will move up, it’s only a question of when.  The structured notes we are looking at today provide equally interesting but very different ways to make a bet on a rate increase, while providing a level of protection to the investor if rates decline.



Customizing your investment strategy with structured notes

This week we look at the specific advantages of structured products as a way to customize a stock purchase.

Why are we interested?

Ford revolutionized the car industry with the introduction of the Model T.  It was the first real standardized car.  Based on the pictures, they all came in black.  Forget about customizing…I don’t think you could even choose a color! Fast forward to today and you can buy a Ford or any other car in multiple colors, choose your wheel size (and cool rims), add all sorts of systems, and so on.  The car has both mass customization (packaged add-ons) and more specialized customization.  In today’s Deconstructed Notes, we will analyze how structured products can offer a user-friendly experience along with precise customization capabilities when purchasing an investment strategy.



Heads I win, tails you lose: Valuing a callable note

This week we examine callable structured notes.  Our representative note and its terms can be found here.

Why are we interested?

Notes with a call feature typically offer very attractive “headline” yields, but these structures often aren’t as attractive as they may first appear.   Generally, they are worth significantly less than a non-callable note with the same features and yield.  In today’s Deconstructed Notes, we will demonstrate why the analyzed callable note that legitimately markets a 15% annual yield is in fact economically equivalent to a 7.35% yield when not callable.  A call feature enables a higher “headline” yield because it introduces a chance that the higher yield is not paid; generally, the probability-weighted interest cost to the issuer is the same as a non-callable note. 



Always Read the Fine Print on a Structured Note

This week we examine a complex structured product masquerading as a straightforward yield note.  Our representative note and its terms can be found here

The name of the note on the term sheet is:

8% Equity Linked Securities due August 6, 2014

Linked to the Common Stock of Halliburton Company


Why are we interested?

Have you ever signed up for a cell phone plan offered at $50 per month but discovered that the bill you received was far higher (e.g., access charges, federal excise tax, universal service charges)?  Apparently, you didn’t read all the fine print… More…