You might want to look at how the interest is calculated.  I am unsure of MITTS, but I have a good understanding of inxed linked CD's, and I do not care for them.

The reason being is, the way the interest is credit at the end is based on a series of "snapshots" of the index, say, every 6 months for a 3 year S&P 500 index CD.

So you get 6 "snapshots" after the intial value that is determined upon settlement, after which the "snapshots" are then avg and that determines your interest credited.  It's actually a slightly more involved calculation (and plainly illustrated in the prospectus), but this is the basic premis.

So in a consistently increasing market, you actually get much less in interest than the index gain due to the snapshot averaging.

I did an actual comparison for a prospect who bought an HSBC S&P 500 indexed linked CD a few months ago, and the broker said to "expect around 6 to 6.5% return."

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years.

He had invested $200,000 in it, and he was so mad he forced his other broker/dealer to bust the trade, he got his cash and we transferred the account.  It helped that he was never issued a prospectus at the time of sale, and then later by email, over a week after settlement. 

[quote=BankFC]

So in a consistently increasing market, you actually get much less in interest than the index gain due to the snapshot averaging. [/quote]

What sort of person buys a CD linked index, knowing they're trading downside protection for some upside opportunity and then complains they didn't get every dime in a rising market?

I wouldn't do a ton on these, but I have to say I have some clients that bough NASD linked CDs in 1998, 1999 and early 2000 that are thrilled with them.

[quote=BankFC]I did an actual comparison for a prospect who bought an HSBC S&P 500 indexed linked CD a few months ago, and the broker said to "expect around 6 to 6.5% return."

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years. [/quote]

Without seeing how you composed your comparison or the details of the particular CD, my first guess is that you have a math error in there somewhere...

[quote=mikebutler222][quote=BankFC]

So in a consistently increasing market, you actually get much less in interest than the index gain due to the snapshot averaging. [/quote]

What sort of person buys a CD linked index, knowing they're trading downside protection for some upside opportunity and then complains they didn't get every dime in a rising market?

I wouldn't do a ton on these, but I have to say I have some clients that bough NASD linked CDs in 1998, 1999 and early 2000 that are thrilled with them.

So are you saying it is realistic to expect similar results today?  If so, I want some of what your taking...

[quote=BankFC]I did an actual comparison for a prospect who bought an HSBC S&P 500 indexed linked CD a few months ago, and the broker said to "expect around 6 to 6.5% return."

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years. [/quote]

Without seeing how you composed your comparison or the details of the particular CD, my first guess is that you have a math error in there somewhere...

Quite pompous on your part to assume a math error on mine. 

I can assure you there wasn't as it was based on THIS calculation, which the other firm acknowledged as accurate, as well as the lack of a prospectus delivered, that my client was able to make a strong enough case with the other firm's management to have his trade reversed.

I would take the time to post the calculation, but honestly, I'd have to hunt up the HSBC prospectus, type it, and explain it, and right now I'd rather finish up here, meet my buddy in town from Mobile, and get an early start on the weekend.

[quote=BankFC][quote=mikebutler222][quote=BankFC] <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

So in a consistently increasing market, you actually get much less in interest than the index gain due to the snapshot averaging. [/quote]

What sort of person buys a CD linked index, knowing they're trading downside protection for some upside opportunity and then complains they didn't get every dime in a rising market?

I wouldn't do a ton on these, but I have to say I have some clients that bough NASD linked CDs in 1998, 1999 and early 2000 that are thrilled with them.

So are you saying it is realistic to expect similar results today?  If so, I want some of what your taking...[/quote]

What I’m saying is just what I said. If you’re getting a downside risk reduction don’t whine when you don’t get every dime of the upside potential. Remember the free lunch lesson.

[quote=BankFC]I did an actual comparison for a prospect who bought an HSBC S&P 500 indexed linked CD a few months ago, and the broker said to "expect around 6 to 6.5% return."

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years. [/quote]

Without seeing how you composed your comparison or the details of the particular CD, my first guess is that you have a math error in there somewhere...

[quote=BankFC]

Quite pompous on your part to assume a math error on mine.  [/quote]

Hardly, I’d call it accurate. Any calculation that says that an index linked note required a 1700% return in the next three years in order for the client to get 6% is flawed.

[quote=BankFC]

I can assure you there wasn't as it was based on THIS calculation, which the other firm acknowledged as accurate, as well as the lack of a prospectus delivered, that my client was able to make a strong enough case with the other firm's management to have his trade reversed. [/quote]

Again, I call BS. Your client could get out because the prospectus wasn’t delivered, period.

[quote=BankFC]

I would take the time to post the calculation, but honestly, …

[/quote]

Yeah, right….

Mike,

I think he meant that the S&P value had to average around 1700, not get a 1700% return.

Bank,

I believe (although I'm not positive), that the CD doesn't register market downturns, so if the S&P dropped from 1300 to 1000 in one snapshot, the client hasn't lost anything (gets a 0% return for that block of time), but if it then increases from 1000 back to 1300 in the next snapshot the client would have an average gain of 15%, which isn't exactly right (due to the averaging process it would actually be lower than this, and I used drastic S&P shifts to illustrate) but close enough or these purposes.

And if I'm way off on this I'd definitely like someone to correct me!

Freedom  I think you are right.  I just looked at the prospectus for the Merrill CD linked to the DJIA.  They do guarantee a minimum return of between 50 to 80$ per thousand TBA) at redemption plus the average of the index performance over the time period calculated quarterly and then averaged to get an ending value.     

[(ending value - starting value) / starting value] x 1000 = redemption amount. 4 yrs.

I guess these types of CDs aren't very liquid and are rather long term. The MITTS, which do trade on the exchange but I don't seem to have access to in the initial offering stage are much shorter and indexed to othe indexes than just the SP or Dow.  

There is usually a 2% to 4% wack you will take when you bid it out to
the street, so be ready for that in terms of your liquidity.

[quote=mikebutler222]

[quote=BankFC][quote=mikebutler222][quote=BankFC] <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

So in a consistently increasing market, you actually get much less in interest than the index gain due to the snapshot averaging. [/quote]

What sort of person buys a CD linked index, knowing they're trading downside protection for some upside opportunity and then complains they didn't get every dime in a rising market?

I wouldn't do a ton on these, but I have to say I have some clients that bough NASD linked CDs in 1998, 1999 and early 2000 that are thrilled with them.

So are you saying it is realistic to expect similar results today?  If so, I want some of what your taking...[/quote]

What I’m saying is just what I said. If you’re getting a downside risk reduction don’t whine when you don’t get every dime of the upside potential. Remember the free lunch lesson.

[quote=BankFC]I did an actual comparison for a prospect who bought an HSBC S&P 500 indexed linked CD a few months ago, and the broker said to "expect around 6 to 6.5% return."

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years. [/quote]

Without seeing how you composed your comparison or the details of the particular CD, my first guess is that you have a math error in there somewhere...

[quote=BankFC]

Quite pompous on your part to assume a math error on mine.  [/quote]

Hardly, I’d call it accurate. Any calculation that says that an index linked note required a 1700% return in the next three years in order for the client to get 6% is flawed.

[quote=BankFC]

I can assure you there wasn't as it was based on THIS calculation, which the other firm acknowledged as accurate, as well as the lack of a prospectus delivered, that my client was able to make a strong enough case with the other firm's management to have his trade reversed. [/quote]

Again, I call BS. Your client could get out because the prospectus wasn’t delivered, period.

[quote=BankFC]

I would take the time to post the calculation, but honestly, …

[/quote]

Yeah, right….

[/quote]

Lol,

Mike, you need to work on your reading comprehension skills there buddy.  I said the S&P needed to avg over 1700, not 1700%. 

Oh, and yes, I am not quite the bulldog forum poster you are, so come Friday afternoon, I am not gonna waste my time looking for prospectus info on a product I don't even use just so I can argue with you on a subject you obviously don't even understand.

[quote=FreedomLvr]

Mike,

I think he meant that the S&P value had to average around 1700, not get a 1700% return.

Bank,

I believe (although I'm not positive), that the CD doesn't register market downturns, so if the S&P dropped from 1300 to 1000 in one snapshot, the client hasn't lost anything (gets a 0% return for that block of time), but if it then increases from 1000 back to 1300 in the next snapshot the client would have an average gain of 15%, which isn't exactly right (due to the averaging process it would actually be lower than this, and I used drastic S&P shifts to illustrate) but close enough or these purposes.

And if I'm way off on this I'd definitely like someone to correct me!

[/quote]

The interest isn't known until the final snapshot, and is based on the averaging like in BL example.  The CD may fluctuate below par prior to maturity (as the S&P may fluctaue below the settlement snapshot value of the S & P) but as long as it is held to maturity, it is a guaranteed return of principle plus usually some guarateed return (usually not more than 2 percent annualized).

They are not very liquid, and as I said before, the reality of it is, they really aren't that attractive.

[quote=BankFC]

Mike, you need to work on your reading comprehension skills there buddy. I said the S&P needed to avg over 1700, not 1700%. [/quote]

My apologies for misunderstanding. Now, on to your claim that;

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years.

Back of the envelope math says you're saying that the S&P avg over 24% from where it is now for the client to earn 6%. I've yet to see one of these things with a participation rate that low. Most call for 50% of current average CD rates versus 70-80% of the average gain of the indexed link. Thus, I still doubt your math

[quote=BankFC]

Oh, and yes, I am not quite the bulldog forum poster you are, so come Friday afternoon, I am not gonna waste my time looking for prospectus info on a product I don't even use just so I can argue with you on a subject you obviously don't even understand.

[/quote]

As expected, we won’t get to see the math you presented to the client

[quote=FreedomLvr]

Mike,

I think he meant that the S&P value had to average around 1700, not get a 1700% return.

You're right, thanks.

Bank,

I believe (although I'm not positive), that the CD doesn't register market downturns, so if the S&P dropped from 1300 to 1000 in one snapshot, the client hasn't lost anything (gets a 0% return for that block of time), but if it then increases from 1000 back to 1300 in the next snapshot the client would have an average gain of 15%, which isn't exactly right (due to the averaging process it would actually be lower than this, and I used drastic S&P shifts to illustrate) but close enough or these purposes.

And if I'm way off on this I'd definitely like someone to correct me!

[/quote]

Again, you're right.

[quote=mikebutler222]

[quote=BankFC]

Mike, you need to work on your reading comprehension skills there buddy. I said the S&P needed to avg over 1700, not 1700%. [/quote]

My apologies for misunderstanding. Now, on to your claim that;

In order for him to get 6%, the S&P needed to AVG (NOT GET TO) over 1700 in the next three years.

Back of the envelope math says you're saying that the S&P avg over 24% from where it is now for the client to earn 6%. I've yet to see one of these things with a participation rate that low. Most call for 50% of current average CD rates versus 70-80% of the average gain of the indexed link. Thus, I still doubt your math

[quote=BankFC]

[quote=BankFC] Mike,

Please take a moment to think about this before you re-post, because the highlighted portion of your above comment continues to illustrate your lack of understanding.  Indexed linked CD's, at least the one's I have seen (HSBC mostly), base the interest on SNAPSHOTS (ex. every 6 months until maturity), not PARTICIPATION RATES (ex. 70-80% of the performance of the index). [/quote]

You're still getting this wrong, Bank, there ARE snapshots (no one's ever said otherwise) , but the 1) The client is NOT exposed to the downside moves  2) The client does NOT get 100% of the upside moves.

At least that applies to the dozens of examples I've seen in the past decade from various issuers. If your example is an exception, please post it, and I'll apologize. Otherwise I have to assume you simply provided the client with faulty math.

[quote=BankFC]
If I find myself with NOTHING to do tomorrow, I'll pull the file and post the exact circumstances...fair enough?
[/quote]

Right, I won't be holding my breath.....

[quote=mikebutler222]

[quote=BankFC] Mike,

Please take a moment to think about this before you re-post, because the highlighted portion of your above comment continues to illustrate your lack of understanding.  Indexed linked CD's, at least the one's I have seen (HSBC mostly), base the interest on SNAPSHOTS (ex. every 6 months until maturity), not PARTICIPATION RATES (ex. 70-80% of the performance of the index). [/quote]

You're still getting this wrong, Bank, there ARE snapshots (no one's ever said otherwise) , but the 1) The client is NOT exposed to the downside moves  2) The client does NOT get 100% of the upside moves.

Your wrong in my example.  There is no set percentage of the upside the client gets, but simply due to the effect of the averaging, the net yield in an upmarket is less.  You quoted a SPECIFIC PARTICIPATION RATE 70-80% in your example), and there isn't one

At least that applies to the dozens of examples I've seen in the past decade from various issuers. If your example is an exception, please post it, and I'll apologize. Otherwise I have to assume you simply provided the client with faulty math.

[quote=BankFC]
If I find myself with NOTHING to do tomorrow, I'll pull the file and post the exact circumstances...fair enough?
[/quote]

Right, I won't be holding my breath.....

Maybe you have the time today to post and re-post all day long, but some of us actually work.

[quote=BankFC] Mike,

Please take a moment to think about this before you re-post, because the highlighted portion of your above comment continues to illustrate your lack of understanding.  Indexed linked CD's, at least the one's I have seen (HSBC mostly), base the interest on SNAPSHOTS (ex. every 6 months until maturity), not PARTICIPATION RATES (ex. 70-80% of the performance of the index). [/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

You're still getting this wrong, Bank, there ARE snapshots (no one's ever said otherwise) , but the 1) The client is NOT exposed to the downside moves  2) The client does NOT get 100% of the upside moves.

[quote=BankFC]Your wrong in my example.  There is no set percentage of the upside the client gets, but simply due to the effect of the averaging, the net yield in an upmarket is less.  You quoted a SPECIFIC PARTICIPATION RATE 70-80% in your example), and there isn't one  [/quote]

I have yet to see one of these animals that doesn't state a participation rate (even 100% is a rate, Bank) against the upside of the index. The fact that the index is measured quarterly, annually or every two days is irrelevant, each one has an averaging element and of course that means the owner can get less than the market. It’s also true there’s a guaranteed minimum rate AND the client doesn’t participate in the downside of the snapshot periods.

Of the dozens I’ve seen less than a handful have had a return based;

 market value on date of maturity - market value on date of purchase (participation rate). They’ve almost all included an averaging mechanism.

At least that applies to the dozens of examples I've seen in the past decade from various issuers. If your example is an exception, please post it, and I'll apologize. Otherwise I have to assume you simply provided the client with faulty math.

[quote=BankFC]
If I find myself with NOTHING to do tomorrow, I'll pull the file and post the exact circumstances...fair enough?
[/quote]

Right, I won't be holding my breath.....

[quote=BankFC]

Maybe you have the time today to post and re-post all day long, but some of us actually work. [/quote]

Right, it isn’t because you got the details wrong, you’re just too busy there in the lobby….

BTW, anyone willing to do a simple web search of how index linked CDs work can find out you’re twisted the details…

Mike,

This is my last post on the subject in that, similar to Put/NASD/Easy, you try to drown posts out in length, and declare "victory" when the other poster simply stops reponding (when to the contrary, they simply found something better to do than troll internet forums).

1)  Don't try to back out of an incorrect statement (participation rates) by saying "uh, oh, well, uh, 100% is a rate too."  You said 70-80% in your example, and inferred that lower rate as a reason for less than market performance.  You were wrong.

2)  I NEVER said the client was exposed to downside moves as in NEGATIVE performance (quote me, you can't), however I did say the CD can dip below par value prior to maturity with the performance of the S&P.  Care to argue with that?

3)  The fact that the snapshot is measured quarterly or annually or every two days is VERY important, for the snapshots are how the interest on maturity is measured!!  Hardly irrelevant as you said!

4)  You keep talking about an averaging mechanism as if I disputed it...I am the one who brought it up!  Check the thread.

5)I try and stay cordial with you, but you couldn't help but try to throw the little insult in there insinuating I work in a bank lobby (which I don't) and that I am merely trying to avoid the details rather than being too busy as I said.

You have caught your fair share of flack for being with however many b/d you have been with (11 maybe?) thanks to being UNFAIRLY outed by some creep, and I would think you above many others could keep a debate above the mudslinging.  Am I wrong?

Mike,

This is my last post on the subject ....

And, of course, you won't be providing the math you used....

1) Don't try to back out of an incorrect statement (participation rates) by saying "uh, oh, well, uh, 100% is a rate too." You said 70-80% in your example, and inferred that lower rate as a reason for less than market performance. You were wrong.

I'm backing away from nothing. They ALL, I say again ALL have a participation rate that I've seen in the last decade. I gave you an example of 70-80%, which is common, but that's not to say that all have that rate. I "inferred" nothing of the sort.

Contrary to what you’ve been saying, an averaging mechanism (where the client does not participate in down periods) can make for a HIGHER return or a LOWER return than the index’s average. I simply pointed out that once the performance in computed via whatever snapshot method is applied, a participation rate is THEN applied to determine payout at maturity, even if this is a rare 100% CD.

2) I NEVER said the client was exposed to downside moves as in NEGATIVE performance (quote me, you can't), however I did say the CD can dip below par value prior to maturity with the performance of the S&P. Care to argue with that?

Nice attempt to create a straw man. The subject of dipping below par before maturity was never, never discussed between the two of us. The fact that the client doesn’t participate in down periods (in some CDs) means that with a 100% participation example, he could actually outperform the index. It’s also guaranteed that he’ll make some minimum (usually 50% of going CD rates for the maturity length involved) return. If you think there’s no such thing as a person that wants/needs some equity exposure and fears (rationally) that the market could easily experience a down 3 year period, fine, avoid these things. Just be accurate in your description.

3) The fact that the snapshot is measured quarterly or annually or every two days is VERY important, for the snapshots are how the interest on maturity is measured!! Hardly irrelevant as you said!

It matters only in so much as what the resulting performance will be in a specific example. It matters not in term of how these things work. That should have been pretty clear.

4) You keep talking about an averaging mechanism as if I disputed it...I am the one who brought it up! Check the thread.

I have no idea where you’re getting that idea. That’s the one element that hasn’t been in doubt. Your assertions about it’s applied and that it assures the client of underperforming the market has been.

5)I try and stay cordial with you, …

Yeah, that’s where this came from in your first response to me “Quite pompous on your part …..“

You have caught your fair share of flack for being with however many b/d you have been with (11 maybe?) thanks to being UNFAIRLY outed by some creep, and I would think you above many others could keep a debate above the mudslinging. Am I wrong?

See the comment of yours above. If that was civility and I mistakenly read it otherwise, my apologies. As far as past exchanges with others, I couldn’t care less about some collection of pixels on a computer screen trying to take issue with my career path (complete with gross exaggerations) in an attempt to do a CYA for themselves over something foolish they‘ve said here.

As it stand now, you continue to insist that this CD requires the index to stay above a 25% gain from current valuations for the client to receive 6%. I’m still not buying it, the BS detectors are going wild. Not without seeing the math. If what you’re saying is correct it will be, by far, the worse deal in a linked CD than I’ve seen in a decade, and I‘ll apologize.

Bank, look, if I overreacted your "pompous" comment, my apologies. The same goes for not choosing my words better in the opening post about a math error. As it stands now, having seen quite a few of these and being familiar with the inner-workings, either that linked CD is, by far, the worse deal I’ve ever seen for a client or there’s an error (and an easy one to make) in the math used for the example.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

When you have a chance I’d be interested in taking a look at it.

I appreciate it.  I actually looked in the file, and I suppose I didn't keep a copy, but I know the client has it, and I am going to meet with him tomorrow anyway (he keeps UNBELIEVEABLE records).  I'll have him brng me a copy for my file, and I'll post it when I can here, hopefully tomorrow evening.

Thanks again,

BankFC