While the U.S. economy continues its agonizing and tentative recovery, other countries are rebounding more quickly from the global slowdown of 2009 and 2010 and are showing signs of growth and expansion even as the U.S. struggles to regain a solid footing. This year several countries have experienced strong appreciation of their currency against the USD like China up 6.5%, Australia up 15%, Singapore up 11%, and Canada up 6%. This could be an opportunity to invest in a currency-linked certificate of deposit (CLCD). A CLCD is a certificate of deposit that provides a performance return based upon the change in valuation of an underlying single currency or a basket of currencies. There may be a nominal interest rate that returns income as well.

There are several important issues to be aware of when investing in a CLCD. First, although the CD is FDIC insured, it is only insured if the bank issuing it fails or becomes insolvent. The FDIC program does not cover loss of value due to currency fluctuation. There is a liquidity risk that may result in the CD having less value or no value in the event that you need to access your funds before maturity. Most CLCDs have a participation rate (similar to equity-linked certificates of deposit) that determines what percent of the currency performance return the investor gets. The most attractive CLCDs offered use 100 percent – meaning that if the currency increases in value by 15 percent over the term of the CD that you will receive the full 15 percent. There are a few ‘exotic’ CLCDs that actually offer a participation rate of up to 120 percent. An equity-linked CD may have an interest cap, but very few CLCDs include an interest cap because the rate of interest is not the primary value driver of the investment. It is usually no more than 0.5 percent annualized.

Let’s take an example. If you were to purchase a CLCD with a face value of $ 100,000 USD that is linked to the Swiss franc (CHF) it might look like this. The CHF which presently trades at 1.0793 to USD and has traded in the past 12 months as high 1.4100 to USD. If you buy the CLCD today the exchange rate is locked in at the current rate of 1.0793. When the CLCD matures in 12 months the prevailing rate will be used to determine the performance return. If for example the CHF resumed its high of 1.4100 at the time of maturity, the rate of return would be 30.6 percent for 12 months. At full participation the investor would receive $ 130,600 USD when redeeming their $ 100,000 USD face value CLCD on year from now.

But the opposite can also occur. If one year ago you purchased a CLCD linked to the Indian Rupee (INR) you would have purchased at an exchange rate of approximately 0.0223 to USD. Today, the INR trades lower at 0.01998 or 10.4 percent less. When you redeem your $100,000 USD face value CLCD you would receive only $ 89,600 USD. The loss of value of $10,400 would not be covered by FDIC insurance because the bank did not fail or become insolvent. The loss was due the change in currency valuation.

It should be clear from our discussion here that CLCDs are more complex than ELCDs due to the volatility of foreign exchange rates. CLCDs are available for terms of 3 months to 5 years and can be linked to a single currency or customized to contain a basket of currencies. While both CDs function in a similar fashion, behavior of the underlying currency or index can be very different and subject to extreme variation over the term of the CD. You should read all materials with care and determine if the investment is suitable for you.

Banks that offer currency-linked certificates of deposit

EverBank

EastWest Bank

HSBC

It wasn’t so long ago that certificates of deposit (CDs) enjoyed a special place in the hearts of savers everywhere. But, CDs were looked down upon by investors who pinned their hopes on generating above average rates of return investing in the stock market. As market volatility took its toll on active investor’s portfolios, a new hybrid investment was created to address the needs of conservative savers. The new offering, called an equity-linked CD, guaranteed return of principal and payment of interest if the market index did well. The best part is that it’s covered by the FDIC program.

Also known as a market-linked CD or the indexed CD, they all follow the same basic premise: offer a time-based deposit vehicle (CD) and link its interest payments to a group of securities or an index. Add a few restrictions regarding how much of the index gain the investor will participate in, put a cap on the amount the investor can realize on an annual basis and make the CDs callable, like a bond. One more feature (for the issuer that is) create two methods to calculate the interest to be paid. Additional information and guidance is provided by the Securities and Exchange Commission (SEC).

Most equity-linked CDs are tied to an index like the S&P 500 or the NASDAQ. This enables CD investors to participate in some of the gain of an improving market. All equity-linked CDs have a participation rate that limits the amount of the index performance that will be used in the calculation of gain. For example, a five year equity-linked CD indexed to the S&P 500 may limit participation to 70 percent of the total gain of the S&P 500. So if the index increases 15 percent the first year and the participation rate is 70, the rate to be paid to the investor would be 10.5 percent. This calculated rate may in turn be subject to a cap which limits the annual interest paid or the lifetime interest. If an equity-linked CD has an annual cap of 9 percent then in this example, instead of being paid 10.5 percent, the investor would receive 9 percent as provided by the limit.

A feature that should be avoided is the callable option whereby the issuer of the CD may call or purchase the CD at face value plus accrued interest. Most banks would buy back an equity-linked CD in a strong economy because despite the participation rate limiting the amount of gain in an equity-linked CD, a well-performing index could drive interest up to the cap limit for several years to come. Taxes may also be different with an equity-linked CD. Because unlike direct investments in equity securities, where you may pay less tax for capital gains or dividends, the interest paid on an equity-linked CD could be taxed as high as 35 percent. Liquidity is concern if in an emergency you need access to your funds. While you won’t lose your principal, you may lose some or all of the interest payable on your CD in the event of early withdrawal.

One last consideration is how to calculate the rate of return. Two methods exist, 1) point to point or 2) averaging. Point to point simply takes the index value date the CD was purchased and compares it to the index value one year later. The difference is the rate payable, subject to the participation rate and cap limit. The averaging method uses six month time periods to establish the performance figure. This usually benefits the issuer, because an average tends to smooth out performance returns that occur near the end of the term.

Clearly an equity-linked CD is more complex than a traditional CD, but it can offer security of your principal and a potentially higher rate of interest. It may also yield no interest if the index declines over the term of the CD. Make sure you understand the restrictions and penalties that apply before you invest in an equity-linked CD.

Banks offering Equity-Linked Certificates of Deposit:

Wells Fargo Bank

Union Bank

HSBC

Harris

Sovereign Bank

Rate information contained on this page may have changed.

I looked long and hard for a bank or credit union with CD rates above 3%. There are not many left. This week though, I did find a competitive rate from a credit union that is open to almost everyone regardless of where you live in the United States. I thought that was a deal worthy of some regognition.

Digital Federal Credit Union (DCU) is offering a 60-month CD that pays 2.86% APY with a $25,000 minimum balance and 2.76% with a $500 minimum balance. It's hard to call 2.86% APY competitive, but it is when the national 5 year CD rate average is 1.56% APY and the highest 5-year CD rate from a bank is 2.78% APY.

DCU is the largest credit union in Massachusetts with over $3 billion in assets. It is headquartered in Marlborough, MA, about 30 minutes outside of Boston and has 21 branches in the greater Boston area. The CD can be opened via a DCU branch or, via an online application.

One of the ways that credit unions differ from banks, is that they have restriced membership. You must meet the membership criteria before you can join and do business with the credit union. DCU's membership criteria is very open and almost anyone can qualify. Like most credit unions, DCU provides membership if a close family member already belongs or if you work or have retired from a certain employer. They also provide membership if you belong to a long list of organizations. For example a $10 membership to the American Association of People with Disabilities qualifies you to join DCU. It's a win-win. You can take advantage of DCU's competitive CD rates and help a worthy charity at the same time. Full eligibility information can be found here.

Digital Federal Credit Union has a Texas Ratio of 19.09% versus the national credit union average of 10.30%. That's higher than normal but still below the 100% threshold that is considered a sign of bank distress.

If you don't live near a DCU branch and don't want to open an account online, check out the best CD rates from banks and credit unions in your local area.

Previous Weekly Rate Deals

• November 29, 2011 - Community First Bank Offering 2.78% APY 60-Month CD
• November 21, 2011 - Premier Federal Credit Union Offering 2% APY on 24-Month CD
• November 14, 2011 - Institution for Savings of Newburyport Offering 3 Year CD at 2.50% APY
• November 7, 2011 - State Savings Bank of Rake, IA Offering 3.82% APY FIRA
• October 31, 2011 - First Choice Bank Offering 2.80% APY 5-Year CD
• October 24, 2011 - First National Bank of St. Ignace Offering 12-Month Flex CD at 1.51% APY
• Oct 17, 2011 - Weekly Rate Deal - Navy Federal Credit Union Offering 3% APY 12-Month CD
• Oct 7, 2011 - Farmers & Traders Bank Takes Weekly Rate Deal for 3% APY 60-Month CD

Check back next Monday for a new bank deal. Email any deals you know about to ratedeal (at) bestcashcow.com. Feel free to also share them below. If you're a bank and have a great deal not listed on BestCashCow, register for access and add the deal to the site.