Market-Linked Certificates of Deposit (MLCD) Certification Training

Presented by: Midwood Financial Services, Inc.

Welcome to Midwood Financial Services Certification Training on Market-linked CDs. The following lesson will prepare you to successfully complete a certification test which is a requirement at your firm in order to sell Midwood-distributed Market-linked CD offerings. What you will learn:

1. What are MLCDs? – The Basics2. Identifying Suitable Investors3. Popular Midwood-distributed MLCD Structures4. What You will Need to Sell5. Midwood’s Role in Your Development and What to do After You are

Certified

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MLCDs – The BasicsMarket-linked Certificates of Deposit (MLCD) are debt obligations issued by banking institutions. While maintaining some general characteristics of traditional CDs, MLCDs allow investors to participate in the growth of certain “referenced securities” such as a basket of stocks or market indices without having invested directly in the securities. They provide investors the opportunity to earn returns above what are typically available in traditional CD products. General characteristics:

FDIC insured up to the statutory limits

Have a fixed maturity similar to bonds

100% principal protected if held to maturity

Available for qualified and non- qualified dollars

Minimum deposit = $1,000 (must invest in $1,000 increments)Potential to earn market-like returns by linking the CD performance to specific asset classes/indicesCurrent offers may include a guaranteed minimum return and the potential for annual income distributionsEarnings are subject to Ordinary Income

Redeemable upon death at par or current market value, if greater.

For more information please refer to the FDIC website.

www.fdic.gov/deposit/deposits/insured/index.html

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MLCDs Are Packaged Investments

0

20

40

60

80

100

Performance ComponentPrincipal Component

MLCD’s can address growth strategies, income strategies or a combination of the two. They can take on a bullish, bearish or neutral market-view. The structure of a MLCD is composed of:

1.Fixed Income Strategy - A zero coupon bond approach is used for the principal protection component and any guaranteed interest rate (if available in the structure). 2.Options Strategy - The options strategy determines any additional returns the investor might receive. These returns are linked to specified asset classes such as market indices, equities (US and/or international), bonds, commodities, currencies etc.

Tied to the Performance of the Referenced Securities

Principal Protection (if held to maturity)

Market-Linked CD

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Identifying Suitable Investors for MLCDs A Comparison: Traditional CDs vs. MLCDs

Interest-bearing Traditional CDs

Viewed as a savings vehicle

No Market Exposure - Generally a fixed interest rate is guaranteed for the term of the CD

Time Horizon - For savers with shorter term time horizon

Availability – At any bank branch office. Of course, there is no securities license required for to open an account

Market-linked CDs

Viewed as an investment vehicle

Market Exposure – Earnings are potentially higher, but variable. Negative performance can result in no distribution

Time Horizon - For investors with a longer term time horizon (five to seven years)

Availability – Can be acquired by working with a securities licensed registered representative...a brokerage account must be opened

As previously stated, traditional CDs and MLCDs share some general characteristics. However, in terms of addressing an investor’s investment objectives, time horizon, risk tolerance and other factors, the offerings are very different. Here are some of the key differences:

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Wanting to diversify their portfolios across different asset classes, while maintaining preservation of capital.

Looking to migrate away from traditional interest rate principal protected instruments, allowing them to potentially receive higher returns than prevailing interest rates

Who are buy and hold investors who have a medium to long term outlook.

Who can understand the complexities of the linked asset.

Willing to accept that their principal value will fluctuate throughout the term of the product.

Who understand that there is no guarantee of a secondary market if you want out prior to maturity

Interested in expressing a particular directional market or asset class view while maintaining principal protection. MLCDs can be structured with a bullish, bearish or neutral view

Identifying Suitable Investors for MLCDs cont. Typical Purchasers Include Those:

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Are traditional CD buyers that require a guarantee of principal and a stable current income from a stated interest rate

Have trouble understanding the complexities of the linked asset

May need access to their funds prior to maturity since there is no guarantee of a secondary market

Not comfortable with seeing their principal value fluctuate during the term of the CD

MLCDs are Not Suitable for Everyone

Not Suitable For Those Purchasers Who:

Popular MLCD Structures

MLCDMLCD

Basket of Stocks (US or Global)

Term: Generally 5 to 7 Years

Designed to pay return annually

Basket of Stocks or a Market Indices

Term: Generally 5 to 7 Years

Designed to pay return at the end of the term

Tax Treatment – OID

ANNUAL INCOME OPPORTUNITY

GROWTH OPPORTUNITY

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Tax Treatment - INT

As mentioned earlier in the curriculum, MLCDs can address income strategies and growth strategies. Below is a snapshot of each strategy and how they differ. Note the difference in tax treatment. It will be discussed in more detail later

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Popular MLCD Structures

Annual Income MLCDs Terms are generally between five and seven years

As the name implies, there is an annual income distribution opportunity

The referenced securities are typically a basket of stocks

Returns are calculated by the percentage change between the annual closing level of each security vs. initial share price. However, the return is capped at a percentage determined at the close of the offering.

Example: Stock 1 is up 11.00% over the initial share price at the end of year one. However the return is capped at 8.00%. Therefore stock 1 is credited with an 8.00% return

Most Annual Income CDs have an “Auto-Cap” feature. This simply means that if the annual closing share price is flat or above the initial share price, the security is automatically credited with the stated cap rate.

Example: Stock 1 is up 4.00% over the initial share price at the end of year one. Since the Auto-Cap feature is in place and the cap is 8.00%, stock 1 is credited with an 8.00% return

Negative performance of each stock is generally limited to a floor i.e. -30%

Tax treatment is Ordinary Income. Annual distributions (if any) are deposited into brokerage account each year. Since distributions are paid out annually, tax treatment is therefore INT.

Annual Income Autocap Payoff ExampleYear 1

Returns

9% Auto Cap

9% Auto Cap

9% Auto Cap

9% Auto Cap

9% Auto Cap

9% Auto Cap

-3%

-5%

-1%

9% Auto Cap

Security Returns subject to 9% Auto Cap Rate

Add them up, and divide by 12 =

6.00%

First Year Coupon: 6.00%

9% Auto Cap

9% Auto Cap

Security 1 +4%

Security 2 -3%

Security 3 +12%

Security 4 -5%

Security 5 +9%

Security 6 + 7%

Security 7 -1%

Security 8 +20%

Security 9 +8%

Security 10 +10%

Security 11 +8%

Security 12 +7%9

Payoff Example, Assuming a 9% Auto Cap Rate, and -30% Floor

Security 1 +1%

Security 2 -3%

Security 3 +8%

Security 4 -8%

Security 5 +8%

Security 6 +5%

Security 7 -1%

Security 8 0%

Security 9 +15%

Security 10

+10%

Security 11

+10%

Security 12

+10%

-5%

-10%

+9%

-20%

+3%

-1%

-4%

-4%

-2%

-5%

+10%

+10%

9%

9%

9%

9%

9%

9%

- 3%

- 8%

- 1%

9%

-5%

9%

9%

-1%

-5%

-2%

- 10%

- 20%

- 4%

- 4%

9%

9%

9%

9%

9%

9%

9%

- 30%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

9%

Important Note – Performances are anchored to the initial trade date.

+6%

+3%

+21%

-50%

+18%

+8%

+7%

+14%

+11%

+5%

+10%

+10%

+21%

+5%

+30%

+7%

+20%

+9%

+17%

+26%

+9%

+11%

+10%

+10%

6.00% 0.00% 5.75% 9.00%Coupon Rate for Applicable Period:

9.00%

Year 1 Actual Return

AdjustedReturn

Year 2 Actual Return

AdjustedReturn

Year 3 Actual Return

AdjustedReturn

Year 4 Actual Return

AdjustedReturn

Year 7Actual Return

AdjustedReturn

…

+40%

+27%

+45%

+30%

+10%

+20%

+13%

+38%

+29%

+12%

+10%

+10%

9%9% 9% 9% 9%

9%9% 9% 9% 9%

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Popular MLCD Structures

Growth Opportunity Terms are generally between five and seven years

Returns (if any), is paid out at the end of the term

The referenced securities are typically a basket of stocks or a market indices

Depending on the structure, returns can be calculated a number of different ways. Most popular:

Point-to-Point - Returns are calculated by the percentage change between the closing level of each security (or the indices) vs. initial price. Return can be capped or uncapped.

Quarterly Averaging - Quarterly Averaging Growth observes several prices over the term of the MLCD. For example, a five-year term would have 20 quarterly observations. To determine the return, you would calculate the average of those prices and compare it back to the initial price. Generally, there is no cap in quarterly averaging

Tax treatment is Ordinary Income. However, since distributions (if any) are deposited into the investors brokerage account at the end of the term vs. annually, he or she is required to pay taxes on “Phantom Income” each year, which is based on estimated annual yields. This estimated yield is set by the IRS each year and it is called OID (Original Issue Discount). At maturity, the actual return will determine if the investor overpaid, which can claimed back or underpaid, which would require additional taxes to be paid when the tax return is submitted that final year.

What You Need to do at Point of Sell Provide client with the Indicative Term Sheet for

the offering presented (comes out in the beginning of the month)

Internal Paperwork Requirements By Your B/D Open a Brokerage Account

Final Term Sheet (comes out at end of the month after settlement)

What Your Clients will Receive

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Midwood Financial Services, Inc., is the nation's largest independently owned distributor and training organization of financial products and services to banks, regional brokerage firms and independent broker dealers. We do not manufacture products. The manufacturers simply outsource distribution and training support to Midwood.

Our team of seasoned professionals look forward to developing a close working relationship with you while helping you to more fully understand the variety of Market-Linked Certificates of Deposit that are available at your firm and distributed by Midwood.

What is the role of Midwood Financial Services?

Matt Will360-910-2187

Mark Bohn713-299-5045

Chris Gilmore727-420-0151

ID

UT

MT

FL

SC

KY

OH

NC

OR

WA

AK

PA

ME

VAWV

MD

HI

LA

UTMD

MA

NH

ME

NJ

DE

CT

Mike Murphy 609-703-3308

Brian David704-974-9039

Byron Snoddy614-746-0443

Chris Gilmore727-420-0151

Mark Bohn713-299-5045

Tim Livak714-878-6766 

Kevin Mulvehill774-545-0243

Training Consultant Territory Map[Click Here to Print]

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Steps to successfully implement Market Linked CDs into your business:

1.Determine the Opportunity• Consider your client base (conservative to moderate risk

tolerance Equity and/or Fixed Income buyers)• Clients sitting in cash or accepting lower fixed income yields?

2.Seek additional education and sales support from your Midwood sales team 3.Provide client awareness by any means approved by your firm

4.Schedule client meetings and propose structured products which meet client investment objectives, goals, and risk tolerance)

Once You are Certified, What’s the Next Step?

This curriculum was prepared exclusively for your internal use and for training purposes only. The information contained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you, whether in whole or in part without our prior written consent.

Additional information available upon request. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. You should refer to any offering document relating to any financial instrument which includes important information, including related risk factors. Clients are urged to consider carefully whether option products in general, as well as any products discussed herein, are appropriate given their objectives, experience, financial and operational resources and other relevant circumstances. This presentation is not intended to provide, and should not be relied on, for tax, legal, accounting, regulatory, or financial advice.

PLEASE PROCEED TO NEXT PAGE

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Are You Ready to Take the Certification Test?You have completed the training portion of your certification. If you are unsure of anything that was covered in this lesson, you may navigate back and review any, or all of the material. Otherwise please proceed to the test.

Thank You!

Click Here to Proceed

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