Certificate of deposits are offered to investors by banks just like a normal deposits. But the difference is certificate of deposits are short term wholesale deposits and they are tradable. An investor holding the certificate of deposit can sell it to another investor. Because of liquidity interest rates on CDs are normally less than that on ‘sight’ deposits.
We can compare certificate of deposits with treasury bills as they are short term, tradable, discounted bonds. But the difference is T-Bills are issued by government and CDs are issued by banks, financial institutions. The lender of a CD could be another bank, corporate or financial institution.
CD is a money market instrument. The term of a CD is fixed and it is usually 3 months,6 months,1 year or 5 years. CDs issued by banks in US are insured by FDIC (Federal Deposit Insurance Corporation). They are virtually risk free; they are money in the bank. In US, banks allow the investors to withdraw the money before maturity date with a penalty.
Some features of CDs in
- Maturity period is Minimum 7 days Maximum: 12 Months for CDs issued by banks. For CDs issued by Financial institutions maturity is minimum 1 year and maximum 3 years.
- Minimum amount to invest in a CD is Rs1 lakh
- Loan against collateral of CD is not permitted (It’s possible in ‘sight fixed deposits’)
- Premature withdrawal is not allowed (can be sold to other investors)
- Interest rate can be fixed or floating
- They are issued at a discount to face value like zero coupon bonds
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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I want to download or have a CD of Indian BSE Equty shares Historical Quotations and List/cost of softwares for on line Trading of equity shares