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Market-Linked Certificates of Deposit (MLCD)           Certification Training              Presented by: Midwood Financial...
MLCDs – The BasicsMarket-linked Certificates of Deposit (MLCD) are debt obligationsissued by banking institutions. While m...
MLCDs Are Packaged InvestmentsMLCD’s can address growth strategies,income strategies or a combination of              Mark...
Identifying Suitable Investors for MLCDsA Comparison: Traditional CDs vs. MLCDsAs previously stated, traditional CDs and M...
Identifying Suitable Investors for MLCDs cont.    Typical Purchasers Include Those:     Wanting to diversify their portfo...
MLCDs are Not Suitable for EveryoneNot Suitable For Those Purchasers Who: Are traditional CD buyers that require a guaran...
Popular MLCD StructuresAs mentioned earlier in the curriculum, MLCDs can address income strategies and growth strategies.B...
Popular MLCD StructuresAnnual Income MLCDs Terms are generally between five and seven years       As the name implies, t...
Annual Income Autocap Payoff Example                Year 1    Security Returns subject to                Returns      9% A...
Payoff Example, Assuming a 9% Auto Cap Rate, and -30% FloorImportant Note – Performances are anchored to the initial trade...
Popular MLCD StructuresGrowth Opportunity Terms are generally between five and seven years    Returns (if any), is paid ...
What You Need to do at Point of Sell   Provide client with the Indicative Term Sheet for the    offering presented (comes...
What is the role of Midwood FinancialServices? Midwood Financial Services, Inc., is the nations largest independently owne...
Training Consultant Territory Map                                               [Click Here to Print]                     ...
Once You are Certified, What’s the Next Step?Steps to successfully implement Market Linked CDs into yourbusiness:1.    Det...
This curriculum was prepared exclusively for your internal use and for training purposes only. Theinformation contained he...
Are You Ready to Take the Certification Test? You have completed the training portion of your certification. If you are un...
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Midland CD Certification Training

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Transcript of "Midland CD Certification Training"

  1. 1. Market-Linked Certificates of Deposit (MLCD) Certification Training Presented by: Midwood Financial Services, Inc.Welcome to Midwood Financial Services Certification Training on Market-linkedCDs. The following lesson will prepare you to successfully complete acertification test which is a requirement at your firm in order to sell Midwood-distributed Market-linked CD offerings. What you will learn: 1. What are MLCDs? – The Basics 2. Identifying Suitable Investors 3. Popular Midwood-distributed MLCD Structures 4. What You will Need to Sell 5. Midwood’s Role in Your Development and What to do After You are Certified 1
  2. 2. MLCDs – The BasicsMarket-linked Certificates of Deposit (MLCD) are debt obligationsissued by banking institutions. While maintaining some generalcharacteristics of traditional CDs, MLCDs allow investors toparticipate in the growth of certain “referenced securities” such as abasket of stocks or market indices without having invested directlyin the securities. They provide investors the opportunity to earnreturns above what are typically available in traditional CD products.General characteristics: FDIC insured up to the statutory limits Have a fixed maturity similar to bonds 100% principal protected if held to maturity Available for qualified and non- qualified dollars For more information please refer Minimum deposit = $1,000 (must invest in $1,000 increments) to the FDIC website. www.fdic.gov/deposit/deposits/insured/index.html Potential to earn market-like returns by linking the CD performance to specific asset classes/indices Current offers may include a guaranteed minimum return and the potential for annual income distributions Earnings are subject to Ordinary Income Redeemable upon death at par or current market value, if greater. 2
  3. 3. MLCDs Are Packaged InvestmentsMLCD’s can address growth strategies,income strategies or a combination of Market-Linked CDthe two. They can take on a bullish,bearish or neutral market-view. Thestructure of a MLCD is composed of: 100 Tied to the Performance of the Referenced Securities1. Fixed Income Strategy - A zero 80 coupon bond approach is used for the principal protection component 60 Principal Protection (if held to maturity) and any guaranteed interest rate (if available in the structure). 402. Options Strategy - The options 20 strategy determines any additional returns the investor might receive. 0 These returns are linked to specified Performance Component asset classes such as market Principal Component indices, equities (US and/or international), bonds, commodities, currencies etc. 3
  4. 4. Identifying Suitable Investors for MLCDsA Comparison: Traditional CDs vs. MLCDsAs previously stated, traditional CDs and MLCDs share some general characteristics. However, interms of addressing an investor’s investment objectives, time horizon, risk tolerance and otherfactors, the offerings are very different. Here are some of the key differences: Interest-bearing Traditional CDs Market-linked CDs Viewed as a savings vehicle  Viewed as an investment vehicle No Market Exposure - Generally a fixed  Market Exposure – Earnings are interest rate is guaranteed for the term of potentially higher, but variable. Negative the CD performance can result in no distribution Time Horizon - For savers with shorter  Time Horizon - For investors with a longer term time horizon term time horizon (five to seven years) Availability – At any bank branch office.  Availability – Can be acquired by working Of course, there is no securities license with a securities licensed registered required for to open an account representative...a brokerage account must be opened 4
  5. 5. Identifying Suitable Investors for MLCDs cont. Typical Purchasers Include Those:  Wanting to diversify their portfolios across different asset classes, while maintaining preservation of capital.  Looking to migrate away from traditional interest rate principal protected instruments, allowing them to potentially receive higher returns than prevailing interest rates  Who are buy and hold investors who have a medium to long term outlook.  Who can understand the complexities of the linked asset.  Willing to accept that their principal value will fluctuate throughout the term of the product.  Who understand that there is no guarantee of a secondary market if you want out prior to maturity  Interested in expressing a particular directional market or asset class view while maintaining principal protection. MLCDs can be structured with a bullish, bearish or neutral view5
  6. 6. MLCDs are Not Suitable for EveryoneNot Suitable For Those Purchasers Who: Are traditional CD buyers that require a guarantee of principal and a stable current income from a stated interest rate Have trouble understanding the complexities of the linked asset May need access to their funds prior to maturity since there is no guarantee of a secondary market Not comfortable with seeing their principal value fluctuate during the term of the CD6
  7. 7. Popular MLCD StructuresAs mentioned earlier in the curriculum, MLCDs can address income strategies and growth strategies.Below is a snapshot of each strategy and how they differ. Note the difference in tax treatment. It will bediscussed in more detail later ANNUAL INCOME GROWTH OPPORTUNITY OPPORTUNITY Basket of Stocks or a Basket of Stocks (US or Global) Market Indices Term: Generally 5 to 7 Years Term: Generally 5 to 7 Years Designed to pay return annually MLCD Designed to pay return at the end of the termTax Treatment - INT Tax Treatment – OID 7
  8. 8. Popular MLCD StructuresAnnual Income MLCDs Terms are generally between five and seven years  As the name implies, there is an annual income distribution opportunity  The referenced securities are typically a basket of stocks  Returns are calculated by the percentage change between the annual closing level of each security vs. initial share price. However, the return is capped at a percentage determined at the close of the offering.  Example: Stock 1 is up 11.00% over the initial share price at the end of year one. However the return is capped at 8.00%. Therefore stock 1 is credited with an 8.00% return  Most Annual Income CDs have an “Auto-Cap” feature. This simply means that if the annual closing share price is flat or above the initial share price, the security is automatically credited with the stated cap rate.  Example: Stock 1 is up 4.00% over the initial share price at the end of year one. Since the Auto-Cap feature is in place and the cap is 8.00%, stock 1 is credited with an 8.00% return  Negative performance of each stock is generally limited to a floor i.e. -30%  Tax treatment is Ordinary Income. Annual distributions (if any) are deposited into brokerage account each year. Since distributions are paid out annually, tax treatment is therefore INT.8
  9. 9. Annual Income Autocap Payoff Example Year 1 Security Returns subject to Returns 9% Auto Cap Rate Security 1 +4% 9% Auto Cap Security 2 -3% -3% Security 3 +12% 9% Auto Cap Security 4 -5% -5% Security 5 +9% 9% Auto Cap Add them up, and First Year divide by 12 = Security 6 + 7% 9% Auto Cap 6.00% Coupon: 6.00% Security 7 -1% -1% Security 8 +20% 9% Auto Cap Security 9 +8% 9% Auto Cap Security 10 +10% 9% Auto Cap Security 11 +8% 9% Auto Cap Security 12 +7% 9% Auto Cap 9
  10. 10. Payoff Example, Assuming a 9% Auto Cap Rate, and -30% FloorImportant Note – Performances are anchored to the initial trade date. Year 1 Actual Adjusted Year 2 Actual Adjusted Year 3 Actual Adjusted Year 4 Actual Adjusted … Year 7 Actual Adjusted Return Return Return Return Return Return Return Return Return Return Security 1 +1% 9% -5% -5% +6% 9% +21% 9% +40% 9% Security 2 -3% - 3% -10% - 10% +3% 9% +5% 9% +27% 9% Security 3 +8% 9% +9% 9% +21% 9% +30% 9% +45% 9% Security 4 -8% - 8% -20% - 20% -50% - 30% +7% 9% +30% 9% Security 5 +8% +3% +18% +20% +10% 9% 9% 9% 9% 9% Security 6 +5% -1% +8% +9% +20% 9% -1% 9% 9% 9% Security 7 -1% - 1% -4% - 4% +7% 9% +17% 9% +13% 9% Security 8 0% 9% - 4% 9% 9% 9% -4% +14% +26% +38% Security 9 +15% 9% -2% 9% 9% 9% -2% +11% +9% +29% Security +10% -5% 9% +11% 9% +12% 9% 10 9% -5% +5% Security 9% 9% 9% 9% +10% 9% +10% +10% +10% +10% 11 Security +10% 9% +10% 9% +10% 9% +10% 9% +10% 9% 12Coupon Rate for 6.00% 0.00% 5.75% 9.00% 9.00%Applicable Period: 10
  11. 11. Popular MLCD StructuresGrowth Opportunity Terms are generally between five and seven years  Returns (if any), is paid out at the end of the term  The referenced securities are typically a basket of stocks or a market indices  Depending on the structure, returns can be calculated a number of different ways. Most popular:  Point-to-Point - Returns are calculated by the percentage change between the closing level of each security (or the indices) vs. initial price. Return can be capped or uncapped.  Quarterly Averaging - Quarterly Averaging Growth observes several prices over the term of the MLCD. For example, a five-year term would have 20 quarterly observations. To determine the return, you would calculate the average of those prices and compare it back to the initial price. Generally, there is no cap in quarterly averaging  Tax treatment is Ordinary Income. However, since distributions (if any) are deposited into the investors brokerage account at the end of the term vs. annually, he or she is required to pay taxes on “Phantom Income” each year, which is based on estimated annual yields. This estimated yield is set by the IRS each year and it is called OID (Original Issue Discount). At maturity, the actual return will determine if the investor overpaid, which can claimed back or underpaid, which would require additional taxes to be paid when the tax return is submitted that final year.11
  12. 12. What You Need to do at Point of Sell Provide client with the Indicative Term Sheet for the offering presented (comes out in the beginning of the month) Internal Paperwork Requirements By Your B/D Open a Brokerage AccountWhat Your Clients will Receive Final Term Sheet (comes out at end of the month after settlement) 12
  13. 13. What is the role of Midwood FinancialServices? Midwood Financial Services, Inc., is the nations largest independently owned distributor and training organization of financial products and services to banks, regional brokerage firms and independent broker dealers. We do not manufacture products. The manufacturers simply outsource distribution and training support to Midwood. Our team of seasoned professionals look forward to developing a close working relationship with you while helping you to more fully understand the variety of Market-Linked Certificates of Deposit that are available at your firm and distributed by Midwood.13
  14. 14. Training Consultant Territory Map [Click Here to Print] Byron Snoddy 614-746-0443 WA ME ME Kevin Mulvehill MT 774-545-0243 Matt Will OR NH360-910-2187 ID MA CT PA NJ UT OH MD MD DE UT WV VA KY NC SC Mike Murphy 609-703-3308 LA AK FL Brian David Tim Livak 704-974-9039714-878-6766 Mark Bohn 713-299-5045 Chris Gilmore Chris Gilmore HI 727-420-0151 727-420-0151 Mark Bohn 713-299-5045 14
  15. 15. Once You are Certified, What’s the Next Step?Steps to successfully implement Market Linked CDs into yourbusiness:1. Determine the Opportunity • Consider your client base (conservative to moderate risk tolerance Equity and/or Fixed Income buyers) • Clients sitting in cash or accepting lower fixed income yields?2. Seek additional education and sales support from your Midwood sales team3. Provide client awareness by any means approved by your firm4. Schedule client meetings and propose structured products which meet client investment objectives, goals, and risk tolerance) 15
  16. 16. This curriculum was prepared exclusively for your internal use and for training purposes only. Theinformation contained herein is provided to you on a strictly confidential basis and you agree that itmay not be copied, reproduced or otherwise distributed by you, whether in whole or in part withoutour prior written consent.Additional information available upon request. This material is not intended as an offer orsolicitation for the purchase or sale of any financial instrument. You should refer to any offeringdocument relating to any financial instrument which includes important information, includingrelated risk factors. Clients are urged to consider carefully whether option products in general, as wellas any products discussed herein, are appropriate given their objectives, experience, financial andoperational resources and other relevant circumstances. This presentation is not intended to provide,and should not be relied on, for tax, legal, accounting, regulatory, or financial advice. PLEASE PROCEED TO NEXT PAGE 16
  17. 17. Are You Ready to Take the Certification Test? You have completed the training portion of your certification. If you are unsure of anything that was covered in this lesson, you may navigate back and review any, or all of the material. Otherwise please proceed to the test. Thank You! Click Here To proceed to the Certification Test 17
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