Do equity-linked certificates of deposit have equity-like returns?
DOI:
https://doi.org/10.61190/fsr.v14i4.4834Keywords:
Financially engineered investment, Certificates of depositAbstract
In recent years, equity-linked certificates of deposit (ELCDs) have become widely available to investors as banks strive to remain competitive. Banks sell these instruments as having the safety of a traditional CD with potential market-like returns. However, valuing these instruments can be difficult because the terms vary and the returns depend upon future market conditions. This paper uses Monte Carlo simulation to examine their return distribution. While individuals might find the typical ELCD a more attractive instrument than a 5-year Treasury note, a synthetic ELCD consisting of a zero-coupon bond and stock index call option may be an even more appealing investment.
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