DEFINITION of 'Bull CD'

A Bull CD is a certificate of deposit whose interest rate is tied to the value of an underlying market index. In other words, the interest rate paid on the CD increases as the value of the market index increases during the life of the CD. These are also known as a Market Linked Certificate of Deposit (MLCD).

BREAKING DOWN 'Bull CD'

This type of CD is most often used by investors looking for a very safe investment that also gives them exposure to the stock market. The CD interest rate does not lose value if the market falls because there is a minimum rate that has to be paid or at least return of initial investment.

How Bull CDs Work

The returns of these CDs, sold by banks and investment houses, may be tied to a basket of selected stocks or a major index like the Dow Jones Industrial Average or the S&P 500.  But the returns can be linked to commodity prices, currencies, and even the Consumer Price Index (CPI), giving investors the possibility of profiting from movements in these sectors without risking their principal.The CDs are backed by the FDIC up to its current limits. (The limit was $250,000 in 2018.)  If the benchmark or index declines by the maturity date, the investor gets their principal back.

If this sounds great, hold on for the downside. There's no free lunch here. If you need to get your money before maturity, the withdrawal penalty can be substantial. Uncle Sam will make you pay ordinary income tax on these just like interest received, and you have to report and pay interest on any gains each year.

In addition, many of these investments cap how much you can make on the upside and don't allow you to participate in all the gains of the index, only a set percentage. The investments omit dividends paid by the stock indexes, an important component of total return. Some of these CDs are structured to only pay gains at the end, and that's significant because it negates the power of compounding and provides a much lower return.

The decline in interest rates that began after the 2008-2009 stock market meltdown caused nearly all issuers to withdraw new issuance of these products. However, as the Federal Reserve began to increase rates in earnest in 2017, that may change. The significant downside of these investment, however, make them most appealing to older investors who want the possibility of getting additional returns without risking their principal.

RELATED TERMS
  1. Brokered Certificate of Deposit

    A brokered certificate of deposit (CD) is a CD that an investor ...
  2. Certificate Of Deposit - CD

    A certificate of deposit (CD) is a savings certificate entitling ...
  3. Promotional CD Rate (Bonus CD Rate)

    A promotional certificate of deposit (CD) rate is a higher rate ...
  4. CD Ladder

    A CD ladder is a strategy in which an investor divides the amount ...
  5. Callable Certificate Of Deposit

    A callable certificate of deposit is an FDIC insured certificate ...
  6. Fixed-Rate Certificate of Deposit

    A fixed-rate certificate of deposit (CD) is an investment instrument ...
Related Articles
  1. Investing

    How To Earn The Most From CDs When Interest Rates Are Low

    Certificates of deposit might not seem like a good place to keep your money when interest rates are low, but they do offer security and stability. And with laddering and studying promotional ...
  2. Investing

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
  3. Managing Wealth

    How To Create A Laddered CD Portfolio

    Laddered certificates of deposit offer safe capital and predictable cash flow, while bringing simplicity to your portfolio.
  4. Investing

    Structured CDs Come With Their Own Risks

    Structured CDs, also known as index-linked CDs, have become more popular lately. But they carry different risks from traditional CDs.
  5. Investing

    Certificates Of Deposit

    Safety is a hallmark of the traditional certificate of deposit (CD) sold by a bank or credit union.
RELATED FAQS
  1. What is considered a good interest rate for a certificate of deposit (CD)?

    Explore the various options available with certificates of deposit and discover how to find the most lucrative rates. Read Answer >>
  2. Can certificates of deposit (CDs) lose value?

    CDs are FDIC insured, so they do not lose face value, though broker-issued CD accounts do carry risks. Read Answer >>
  3. How are yields taxed on a certificate of deposit (CD)?

    Learn how interest earned on a certificate of deposit is taxed and how this may reduce the total return of an investment ... Read Answer >>
Trading Center