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Harry Gross: Are those new indexed CDs a good deal?
Dear Harry: Yesterday, my brother told me about a new type of CD called an "Indexed CD." He said that these CDs were guaranteed by the FDIC and had their return based on a stock index of some kind.
I went to my bank today, and we discussed their Indexed CDs. They are offering a CD for five years with a return of 40 percent of the increase in the S&P 500 index.
I think this is a good deal, but my wife wanted me to check with you before she would OK an investment. What's your take on this?
What Harry says: These CDs are not new. They've been around for at least the last 20 years. However, they never were very popular until the stock tumble of last year. Some returns are tied to interest rates on Treasury Bonds, some to stock indexes, some even to commodity indexes.
There are some things that you have to be aware of before you go in. The only FDIC guarantee is for your initial investment. In a regular CD you can cash-out with only a loss of a little interest. Here, you might have to take a larger hit for getting out early . . . if you're permitted to get out early. The returns are often more complicated than they appear on the surface with conditions that are not too clear to the average investor. The bottom line: they're OK, but (as in all investments) don't put more than half your investments into this category.
Write Harry Gross c/o the Daily News, 400 N. Broad St., Philadelphia, PA 19130. Harry urges all his readers to give blood - contact the American Red Cross at 800-GIVE LIFE.
