CHARLOTTE, N.C. - NationsBank Corp. has joined the parade of banks offering insured certificates of deposit with yields tied to the stock market.
Over the past year, several big banks, including Citicorp and Shawmut National Corp., have introduced such CDs. Their aim is to provide an alternative with a potentially higher yield to customers weary of the low returns on fixed-rate CDs.
NationsBank's offering, dubbed the Stock Market CD, will pay interest annually at a rate that will vary with the ups and downs of the Standard & Poor's index of 500 stocks.
"It's giant carrot dangled before the eyeballs of consumers who are frustrated by 3% and 4% yields on CDs," said Robert Heady, publisher of Bank Rate Monitor, North Palm Beach, Fla.
Tax Questions
NationsBank's stock-indexed CD is unlike those of other banks in that annual interest payments will be made. Industry sources said this appears to be an attempt to get around tax questions that have arisen with stock-indexed CDs that pay interest in a lump sum at maturity.
NationsBank's stock-indexed CD will enable customers to "participate in the stock market's long-term growth without risking principal," the company said in a news release.
The CD has a five-year term, and is available to customers with at least $ 10,000 to invest.
FDIC Insured
Because the CD is backed by the Federal Deposit Insurance Corp., depositors are guaranteed repayment of principal, no matter how the stock market fares.
To calculate interest payments for each 12-month period, NationsBank will average the month-end values of the S&P 500, and compare the resulting figure to the value at the beginning of the period.
If the index has risen over the 12 months, interest will be paid at a percentage equal to the gain. If the index has remained flat or has fallen, no interest will be paid.
Had NationsBank offered the Stock Market CD over the five years from Jan 1, 1988, to Dec. 31, 1992, depositors would have earned an annual percentage yield of 7.19%, according to an example prepared by the bank. A $ 100,000 investment would have grown to $ 141,521.85.
During the same five-year period, the S&P 500 stock index gained 59%, meaning that an investor could have done better by investing directly in the stocks that make up the index or in a mutual fund tied to the index.
However, NationsBank said in its news release, "the NationsBank Stock Market CD is designed for conservative investors who are willing to give up some potential gains in return for downside protection."
Initially, NationsBank will offer the CD to clients of two specialized units: private banking, which serves high-net-worth individuals, and professional and executive banking, which targets corporate executives and professionals such as doctors and attorneys.
In addition, the CD will be available to all NationsBank customers in Texas, where it will be offered through 220 retail banking centers.
Eventually, the CD will be offered to retail customers throughout the NationsBank network, but no schedule has yet been established, said Martha Larsh, a bank spokeswoman.
