What do you think about this CD deal?

[disneysteve]

JP Morgan has a 15-year CD with a rate that is tied to the LIBOR.

The first 5 years, it pays 5.25%.
The second 5 years, it pays 7.5%.
The third 5 years, it pays 10%.

It is callable after one year.

It is FDIC-insured.

Here's the catch. If the LIBOR rises above 6.0%, interest stops until the LIBOR drops back below 6.0%. That is evaluated on a daily basis. Currently, the LIBOR is somewhere around 0.4%. I think it topped 6% last in 2008 and before that in 2000.

For someone looking for higher income from a conservative investment, like a retiree for example, what do you think about this? Principal is safe as it is FDIC-insured. Even if the LIBOR tops 6% temporarily, the interest earned the rest of the time is far above current market rates. The CD could be called in 1 year, but it will earn 5.25% until then.

Only big downside is if rates shoot up and stay there for an extended period.

[GREENBACK]

Sounds intriguing. I personally don't see interest rates rising very soon but likely will in 15 years. A guaranteed 10% for 5 yrs. is enticing and especially for a younger retiree with extra cash sitting around.

[simpletron]

I haven't read the fine print(couldn't find it), but I suspect that there are no withdraws except for death or similar circumstances. If that is in the fine print, then I wouldn't recommend buying this for anyone - little possible gain with huge possible losses versus CDs/money markets.

The odds that this CD pays 10% interest is practically 0. If LIBOR is below 6%, then bank calls the CD. If LIBOR is above 6%, you're stuck earning 0%, where you could of been earning at least 6% in CDs/money markets. So you gain nothing or lose all interest versus CDs/money markets.

A very similar arguement can be made 7.5% except given the lower spread and more time left, it is possible that bank would allow you to earn 7.5%, if it is likely that the bank will recoup the interest in the near future. Thus even if you're paid the higher rate, you'll likely lose in the end. The end result is the same as the 10%, you either gain little to nothing or lose all interest versus CDs/money markets.

The best results for you are for the bank to call the CD. this product is the bank trying to insure against future rate increases and if it doesn't go the banks way, they drop you before you really win. whereas you end up being trap with a loser if it does go the bank's way.

[bjl584]

Is there a minimum investment amount?

[disneysteve]

Originally Posted by bjl584

Is there a minimum investment amount?

I don't know.

[wincrasher]

I'd pass unless:

The interest was capped, not suspended and
If they could call, then you could exit.

This thing is like buying a hedge fund or derivative