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I’ll Pass On EverBank’s Latest CD Offer

EverBank logoMy email in-box has been peppered lately with promotional CD offers.

First CIT Bank, then USAlliance FCU — and now EverBank.

The Florida-based, primarily online bank has launched a promotion for a MarketSafe Treasury CD — an “indexed” CD which, not surprisingly, has both complexities and risks.

This 5-year CD will be issued June 23, 2014, and mature June 21, 2019.

Deposit funds must be received by June 11, 2014. The minimum is $1,500.

The CD doesn’t pay interest, but entitles the owner to a single payment at maturity equal to its principal balance plus a “market upside payment” based on the change in the 10-year Treasury yield over the CD’s term.

The market upside payment is the product of the principal balance, the percentage point increase, if any, in the 10-year Treasury yield between June 18, 2014, and June 18, 2019, and something called a “leverage factor.”

There is no maximum, but if the 10-year Treasury yield doesn’t increase during the 5-year period, the depositor receives only the principal balance at maturity.

EverBank provides examples of what the owner would receive at maturity, assuming a $10,000 deposit, an initial 10-year Treasury yield of 2.60% and ending yields of 6.00%, 3.00% and 2.00%:

Yield at maturity Difference Net return Deposit value
6.00% 3.40% 11.22% $11,122
3.00% 0.40% 1.32% $10,132
2.00% -0.60% 0.00% $10,000

The CD is entitled to federal deposit insurance up to applicable FDIC limits.

The principal is fully protected. If EverBank fails prior to the CD’s maturity, however, the depositor will receive no market upside payment.

There are other issues lurking here as well.

First, early withdrawal isn’t permitted, except in the case of death or incompetence. Even then, the owner may not receive the full principal back.

Also, the CD is a “contingent payment debt instrument” treated as having “original issue discount” (OID) under IRS rules.

That means the owner must pay income taxes each year on imputed interest based on EverBank’s estimated comparable yield, even though receiving no actual interest payments.

Current taxes aren’t payable, of course, if the CD is held in an IRA. But EverBank’s custodian charges a $35 annual fee.

Finally, the investor has to consider whether the potential payout is attractive.

As indicated above, if the 10-year Treasury yield increases from 2.60% to 6.00%, the payment at maturity on a $10,000 deposit would be $11,122.

A $10,000 investment in EverBank’s 5-year 2.23% APY Yield Pledge CD would return $11,168.

Enough said.

Thanks, but no thanks, EverBank. I, for one, prefer to keep things simple.

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