Callable Variable Rate Range Accrual CDs Linked to 6-Month USD LIBOR and the S&P 500 Index Due August 31, 2027

The sellers of structured CDs categorize them as “fixed income” although they are dependent on the performance of underlying equities or baskets of equities, raising questions (to begin with) about their suitability for retired investors and the role of structured CDs in any portfolio that is properly asset-allocated. FDIC protection of the principal is a selling point. On the downside, these instruments tie up the investor’s principal for a number of years, the coupon yields are often unpredictable beforehand, and the calculations are often obscure and complex, with tricky caps and limits.

Among the hundreds of structured CDs offerings by major issuers this one distinguishes itself by its complexity. It pays off quarterly based on the number of days the S&P 500 exceeds a pre-determined level, with two other factors for interest and leverage. That interest factor fluctuates through the life of the CD. After the first year, that interest factor is dependent on the difference between a stated rate and the six-month LIBOR at the interest reset date. That calculated rate must fall between 0% (the minimum rate) and a maximum interest rate that changes during the entire term. This is what comes back to the investor, assuming the issuer hasn’t called back the paper, which it can do at any time. As to whether this was an earnest market calculation by the financial engineers at JPMorganChase, we cannot say, but the calculation seems to build in a number of basic protections for the issuer and a number of basic question marks for the investor.

Thanks to securities expert Craig McCann and his associates at the Securities Litigation and Consulting Group for highlighting and researching this particular product.