General

Q: Why do interest payments vary slightly on CDs?
A: Banks are required by law to pay interest on deposits based upon the actual number of days in the accrual period. So, for example, a monthly pay CD will pay a slightly higher amount in a 31-day month than in a 30-day month. Of course, the total of the twelve monthly payments within a year will equal one full year's interest at the stated coupon rate. Similarly, for semi-annual pay CDs, the number of days in each six month coupon period will vary between 181 and 184 days, depending upon the months in which payments are made. Again, the total of the two payments will equal one full year's interest.
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Q: What is the difference between the Annual Percentage Yield (APY) and the Bond Yield (BEY) for a CD?
A: Annual Percentage Yield is a very simple measure of the average interest rate earned on a CD during its term. Although APY has some shortcomings as a measure of value (which are described below), its disclosure is required under The Federal Reserve's Regulation DD (Truth in Savings Act) for all primary market (new issue) CDs. In fact, APY is the only yield measure that may be disclosed to the individual investor.

Bond Equivalent Yield is important for you, the investor to understand and is calculated in accordance with "street conventions" for fixed-income investments. Thus, making it much more useful for comparing CDs to other investment choices. For this reason, it is wise to understand both measures, and the differences between the two, before making a purchase.

In many cases, APY is perfectly acceptable. For a fixed-rate, semi-annual coupon paying CD sold at par, the coupon rate, APY and BEY are equal. However, for the following CD structures APY can be misleading.
Monthly Pay CDs - Receiving interest payments monthly rather than semi-annually benefits the investor. Bond Equivalent Yield, which is a "time value of money"- based measure, reflects this value in that a monthly pay CD will have a somewhat higher BEY than a semi-annual pay CD with the same dollar price and coupon rate. Because the APY calculation is based only upon the amount of interest received per year, and not the timing of interest payments, the APY for the two CDs would be the same.

Step-Up CDs - Again, the APY is concerned only with the interest amount and not timing. The APY for a Step-Up CD is simply a weighted average of the coupon rates paid over the term of the CD - a dollar received in year one carries the same weight as a dollar received in year ten. BEY, on the other hand, more correctly assigns a greater present value weight to payments that occur sooner. Because the low, early coupons are given a greater weight than the high coupons in the late years, the BEY for a Step-Up CD is lower than the APY.

Zero Coupon CDs - The APY formula for zero coupon deposits produces an annualized accretion rate, making it ineffective as a means of comparing ZCDs to other zero coupon investments, which usually quote a semiannual bond equivalent yield. For example, a ZCD which accretes semi-annually at 7% BEY would have an APY of 7.123% (1.035 x 1.035 = 1.07123).

To summarize, APY understates the true yield of monthly pay CDs, while it overstates the yields of Step-Up and Zero Coupon CDs.
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Q: What is the difference between "Blue Skied" and "Blackout"?
A: The term "Blue Sky" refers to individual state securities laws. It is derived from the regulators' original intent to protect individuals from investing in fraudulent corporations that had nothing behind them but "blue sky." Each state, through its Blue Sky laws, establishes its own procedures for registering securities offered in that state, and also indicates the types of investments that will be exempt from such registration.

Most Brokered CDs are exempt from registration in all 50 states. However, some states limit the exemption to CDs issued by only certain types of depository institutions. If an issuer's CDs are not exempt from registration in a particular state, it is up to the issuer to either comply with the registration requirements or forego sales to investors in that state. For such issuers, Bonds.com will clearly indicate on each CD offering any Blue Sky restrictions that must be observed.

Some banks are concerned that their Brokered CDs may compete with traditional CDs sold through their branch network. To prevent this, they restrict or "blackout" the sales of Brokered CDs in those states where they have such branches. Blackout restrictions, if applicable, are also noted on the CD offering.
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Secondary Market

Q: What if my client has to sell their Brokered CD?
A: Bonds.com, along with other broker-dealers, may maintain an active secondary market for Brokered CDs. As is the case with other fixed-income investments, a bid is given based on current market conditions.
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Q: Is there a penalty if my client needs to sell their Brokered CD?
A: No penalty is levied on Brokered CDs because a secondary market exists. However, the price depends on market conditions, and may be higher or lower than the original purchase price.
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Q: How will my client know what their Brokered CD is worth?
A: In order to comply with NASD and/or NYSE requirements, customer statements must reflect an end-of -month market value1 for CDs with maturities of more than one year. This should be an estimate of the price the investor might receive if the CD is sold prior to maturity. If needed, Bonds.com provides month-end pricing on all types of CDs and these prices can be found on the Bonds.com website as well as by contacting a Bonds.com representative.
1. Market value may be determined by using actual values or by using a model or matrix. If actual pricing is not utilized, the pricing method utilized must be disclosed to the customer on the statement along with a caveat that such price may not be the actual price a customer would get in the event the long-term CD is sold prior to maturity.
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Q: How Does the call feature work?
A: After the initial non-call period, the issuing bank has the right (but not the obligation) to call or redeem the CD prior to its stated maturity for any reason.
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Q: What causes the CD to be called?
A: As a practical matter, an issuer will generally decide to call a CD when it determines that the level of interest rates, the shape of the yield curve and volatility of interest rates are such that it can issue a new CD at a lower rate than the existing CD.
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Zero Coupon CDs

Q: Explain Original Issue Discount (OID) and the tax treatment?
A: A debt instrument generally has Original Issue Discount when it is issued for a price less than its stated price at maturity (principal amount). The OID is the difference between the stated redemption price at maturity and the issue price.

Taxation: For ZCDs with maturities of more than one year, investors are subject to income tax on the accreted interest, even though it is not received as a coupon payment (this is often referred to as "phantom income"). As interest is declared each year, the investor's cost basis increases, reducing the tax consequences at maturity. Gains or losses are based upon the investor's accreted value at the time of sale, maturity, or early redemption. OID also applies to Market Index Linked CDs as well.
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Q: How is the accreted call price calculated?
A: Each six months, the accreted value of a ZCD increases by an amount equal to the previous accreted value times the accretion rate (yield) times the number of days in the semi-annual period divided by 365. For example, a ZCD issued on 7/1/2002 with a 15-year maturity and a one-year non-callable period that has a yield of 7.00% would have an original issue price of 35.60148. The example below shows the calculation of the accreted call price on the first call date (7/1/2003).

Accreted value on 1/1/2003 = 35.60148 x (1 + 184 x .07) = 36.85777 365
Accreted value on 7/1/2003 = 36.85777 x (1 + 181 x .07) = 38.13719 365
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Q: What does my client's estate receive when exercising the Estate Feature?
A: Since Zeros are FDIC insured up to their accreted value, the estate feature value would be the accreted value on the payout date.
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Estate Feature

Q: How does the Estate Feature work?
A: All CDs issued in the Bonds.com CD exchange carry an estate feature. CDs with this feature are eligible for redemption at par without a penalty, in the event of death or adjudication of incompetence of the registered owner. Interest will typically accrue up until the date of payment. This is a valuable feature in planning one's estate and protecting assets.
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Q: My family member passed away, how do I redeem the CD?
A: Generally, all Brokered CDs are registered with DTC. Therefore, broker-dealers must provide all relevant information to the issuer via DTC. Items needed include a certified copy of the death certificate and affidavit of domicile. In the case of incompetence, financial advisors must include a court order of appointment (i.e. guardian or conservator).
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Q: How long after someone dies can the CD be redeemed?
A: There is typically a 6-month grace period from the date of death for requests for redemption or transfer of ownership. Any exceptions for extension are made on a case-by-case basis by the issuing institution.
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Q: How long will it take for my family to receive their money?
A: Assuming all necessary documentation is provided to the bank, most early redemptions take seven (7) to ten (10) business days.
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Q: How does the Estate Feature work with different account types?
A: Individual Accounts - The official representative of the estate can make a request for redemption or change in ownership.

Trust Accounts - A Revocable Trust can submit a request upon death or incompetence of the Grantor or creator of the trust. However, Irrevocable Trust accounts are NOT eligible for the estate feature.

Joint Tenants w/Rights of Survivorship - A request for redemption or change in ownership can be made by the surviving tenant due to the death of one of the original owners.
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FDIC Insurance Coverage

Q: When two banks merge, how does this affect my insurance?
A: Whenever two or more insured depository institutions merge, the assumed deposits continue to be separately insured until maturity. Thus, if an investor owns the maximum insured amount of each bank name before the banks are merged, the full FDIC insurance coverage continues after the merger even though the total deposit in the merged institution is greater than the maximum amount permitted by law. Of course, the investor would be unable to purchase any additional deposits from the new institution.
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Q: Does FDIC insurance cover accrued interest and premiums?
A: Both principal and interest are covered as long as the balance remains at or below the limit of $100,000 per depositor, per institution. When purchasing blocks of CDs, it is wise to purchase an amount just below $100,000 so that FDIC will cover the accrued interest.

FDIC covers the face value of the CD, not the amount that the investor paid for it. For example, if an investor purchased $90,000 face value of a CD at 102, the 2-point premium is not covered. The investor owns $90,000 face value and this is the amount that the FDIC will cover.

See the website address below for additional information:
www.fdic.gov/deposit/deposits/insured/basics.html
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Q: How do I know if my CD is insured?
A: The following website address provides details on whether or not a specific banking institution's deposits are covered by FDIC insurance:

Due to the complexity of certain trust documents and employee benefit forms, we suggest that investors seek additional advice when determining the FDIC treatment of such accounts.