Structured & alternative-income investments
Market-Linked Notes
A note or bank CD whose return is calculated from an index rather than a fixed rate, usually with principal repaid at maturity and the upside scaled by a participation rate or a cap.
A market-linked note pays no ordinary coupon; instead it credits a return at maturity based on the movement of a reference index, with the downside limited or removed and the upside scaled by a participation rate and often truncated by a cap. The same structure comes in two legal wrappers: a note, which is unsecured bank debt, and a market-linked CD, which is an insured bank deposit. Because almost all use price-return indices and pay nothing along the way, the buyer gives up dividends and current income in exchange for the protection.
Interest from lending Truly passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
A market-linked note or CD asks the buyer to give up a stated interest rate in exchange for a payoff at maturity that is calculated from an index, most often a broad equity benchmark. Two legal wrappers carry this same idea and they are not interchangeable. A market-linked note is senior unsecured debt of the issuing bank or broker-dealer, so its promise is only as good as that institution's credit. A market-linked CD is a bank deposit, which brings FDIC insurance up to the standard federal limit per depositor, per insured bank, per ownership category.
The index return is usually measured point to point, from a starting level fixed at pricing to a final level read at maturity, or as an average of several periodic readings taken near the end. Averaging softens both a strong finish and a weak one, which matters more than it sounds. A participation rate then scales whatever index gain is measured, a cap sets the ceiling on what can be credited, and either a floor or a full repayment of principal defines what happens if the index falls.
Almost all of these structures reference a price-return index, meaning the index's dividends are never credited to the holder. That forgone dividend stream, along with the issuer's own funding rate, is what pays for the principal protection. A smaller family of variants replaces the lump-sum, participation-based payoff with an annual fixed or contingent coupon; those behave more like the income-generating structured notes described elsewhere and blur the line between this instrument and that one.
Under the hood, the issuer buys a call spread on the index and invests the remaining proceeds at its own cost of funds. The terms it can offer therefore track option prices and interest rates, not any institutional view on where the index is headed.
What it pays
Most of these instruments pay nothing until maturity. The entire economic outcome arrives as a single payment at the end of the term, so the return is best described as terminal value rather than income, and there is no cash flow to reinvest or spend along the way.
The size of that eventual payoff is driven by the price of the option the issuer must buy to fund it: the cost of a call spread that depends on the index's volatility, its dividend yield, the length of the term and the level of prevailing interest rates. Higher rates make the principal guarantee cheaper to fund, which frees up more money for the option and tends to produce better participation rates and higher caps. Low rates compress terms in the other direction.
Averaging, caps, and the use of a price-return rather than total-return index all reduce the payoff relative to simply holding the index outright. None of these are hidden fees in the conventional sense; they are the mechanical price of the downside protection, paid in forgone upside rather than in a stated charge. For notes, the issuer is required to disclose an estimated value below the public offering price, which is one visible marker of that cost; for CDs the equivalent cost is folded into the participation rate and cap rather than itemized separately.
If the index finishes flat or below its starting level, the holder gets face value back and nothing more, having tied up the money for the full term with no interest and no dividends to show for it.
Costs and taxes
There is no separate invoice. Selling concessions, the issuer's hedging cost, and its margin are all embedded inside the offering price rather than charged as a visible fee.
Tax treatment is the more consequential cost. Both market-linked CDs and most principal-protected notes are commonly treated under US federal tax rules as contingent payment debt instruments. That means the holder must accrue original issue discount as ordinary income every year the note is outstanding, even though no cash is received until maturity, producing phantom income that has to be paid from other funds.
Selling before maturity does not restore normal capital gains treatment; under these rules a sale generates ordinary income or ordinary loss rather than a capital gain or loss, which removes one of the usual rewards for a long holding period. Because the annual accruals are ordinary income with no matching cash, these instruments are frequently placed inside tax-deferred or tax-exempt accounts, which changes when the tax is owed but does nothing to change the underlying economics of the structure.
On the CD wrapper, FDIC insurance covers principal and any accrued interest within the standard limit, but it insures the deposit, not a projected index-linked return; the index-linked amount, if any, is credited only at maturity and carries no federal insurance of its own.
Liquidity and time commitment
Neither wrapper trades on an exchange. A note's secondary market is a discretionary bid from the issuing bank, offered at its discretion and on its own pricing. A CD's secondary market is a thin dealer market, typically accessed through the selling broker, and usually available only at a markdown to face value.
Mid-term pricing can look counterintuitive: the note can trade below par even after the index has risen, because the embedded option still carries time value that has not been realized, and an early buyer will not pay full value for value that has not yet crystallized. Terms commonly run several years, and the principal protection applies only at the final valuation date specified in the contract, so selling early forfeits that protection along with any accrued gain.
A minority of CDs include a death put, or survivor's option, permitting redemption at face value if the holder dies during the term. This is a genuine and contractually specified liquidity feature that distinguishes some CDs from the note wrapper, which typically has no equivalent.
Ongoing effort is close to zero. There is nothing to monitor, rebalance, or roll during the term, and no decision is required until maturity. The tradeoff for that passivity is that FDIC insurance, where it applies, protects against the bank failing; it does not protect against needing the money early and having to sell at a market price below face value. That distinction accounts for most of the disappointment holders report.
How it goes wrong
On the note wrapper, the issuing bank's own failure is the central risk: both the return formula and the principal protection are promises of that one institution, and neither survives a default in the way FDIC insurance would for a CD.
The most common disappointing outcome is not a crash but stagnation. The index goes nowhere for the entire term, and the holder simply gets face value back years later, having forgone interest and dividends the whole time for protection that was never needed.
Caps do the most damage in exactly the years that would have justified taking the index exposure in the first place, truncating the strongest returns just when they would have mattered most. Averaging features work quietly in the same direction, shaving a meaningful share off a strong final year in a way that is easy to miss reading a term sheet but shows up clearly at maturity.
In a taxable account, phantom original issue discount income arrives every year regardless of whether the index has moved, creating a tax bill that must be funded from other sources long before any cash from the note itself appears. And because the note and CD wrappers look nearly identical on a term sheet, buyers sometimes discover which one they actually hold only when the issuing institution runs into trouble, at which point the difference between unsecured debt and insured deposit stops being academic.
What to remember
- The payoff is calculated from an index's price return, not credited as a stated interest rate, and it is scaled by a participation rate and usually capped.
- A market-linked note is unsecured bank debt; a market-linked CD is an FDIC-insured deposit up to the standard limit — the wrappers carry very different failure modes.
- Nearly all reference price-return indices, so dividends are given up, and that forgone income is a large part of what funds the principal protection.
- Most structures are taxed annually as ordinary income on accrued original issue discount even though no cash arrives until maturity, and this phantom income persists even on early sale.
- There is no exchange market; an early exit depends on a discretionary issuer bid or a thin dealer market at a markdown, so the instrument is built to be held to maturity.
- Caps and averaging bite hardest in strong markets, and a flat or falling index simply returns face value after years of forgone interest — the most common outcome is stagnation, not loss.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Bonds, Cash Rates.
Frequently asked
Is a market-linked CD the same as a market-linked note?
Why would I owe tax when nothing has been paid to me?
Do I receive the index's dividends?
What determines the participation rate on offer?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.