If you redeem a conventional CD before it matures, you'll forfeit some of your interest earnings but you'll still recoup your initial investment. That's not always true with market-indexed CDs. If you sell a market-indexed CD before it matures, you could lose some of your principal, says Robert Mooney, acting deputy director for the Federal Deposit Insurance Corp.'s division of supervision and consumer protection.

If you have to redeem your market-indexed CD before maturity, your bank may allow you to get your money only on specific "liquidation dates," which are disclosed ahead of time.

For example, if the underlying index rises 15 percent, the cap may limit your CD's earnings to just 6 percent, the NYSE says. Make sure you understand any caps or other limits on earnings before you invest.

"We've seen some complaints where customers were wondering, if the S&P 500 went up 10 percent why they didn't see a 10 percent increase in their return," Vogel says.

Even though some of your returns are linked to the stock market, all the earnings on a market-indexed CD are considered interest for tax purposes.

That means they'll be taxed at your ordinary income tax rate, not the lower capital-gains rate for long-term investments in stocks and mutual funds.

You won't receive your interest earnings until the CD matures, but you'll be required to pay taxes on the increase in the value of the CD every year. The only way to avoid paying taxes on this phantom income is to keep your CDs in a tax-deferred account, such as an individual retirement account.

If you understand these risks and still want a CD with some potential for above-average returns, then a market-indexed product might have a place in your portfolio.

But most people who invest in CDs buy them because they're very safe and deliver a guaranteed interest rate as long as they're held until maturity, says Patricia Struck, president of the North American Securities Administrators Association. When you buy a market-indexed CD, she says, "That's not what you're getting."

If you want the security of a traditional CD but would like to earn above-average returns, shop around. Though the average rate for a one-year CD is 4.65 percent, several banks are offering 5 percent or more, according to Bankrate.com.

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