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Glossary

Certificate Of Deposit (CD)

Category — Bond Types
A Certificate Of Deposit (CD) - is a certificate that allows the holder to receive interest. This certificate has a maturity, a fixed interest rate and can be issued in any denomination. Such certificates are usually issued by commercial banks for a period of between 1 month and 5 years. This deposit limits the holders in withdrawing funds before the expiration date of the certificate: early withdrawal is possible, but most often with a penalty.

The certificate of deposit can be registered or bearer. It differs from the usual bank deposit in that it usually offers higher interest rates and can be quoted on the exchange.

Compared to stocks and bonds, certificates of deposit are more reliable instruments with non-volatile guaranteed paybacks.

The following conditions must be fixed in the certificate of deposit:

• volume;

• term;

• the financial institution that issued the certificate of deposit;

• interest rate. Fixed interest rates seem to be more reliable and the payment on the certificate is predictable in this case, however the client may suffer losses if market interest rates rise strongly. For this case, floating interest payments will be preferable.

There is a discount certificate of deposit, when a customer purchases it at a large discount and, upon redemption, receives a payment equal to the full face value, but does not receive any periodic payments during the life of the certificate of deposit. For example, a customer purchases a certificate of deposit for $ 500 and at the end of the term receives a face value of $ 1000. However, in addition to the obvious disadvantage that the client does not receive periodic interest payments, there is another disadvantage: the client’s tax base will increase every year, since the client’s income will be distributed over the entire certificate validity period, but in reality it will be received by the client only after the expiration date.

There are other types of certificates of deposit such as:

• revocable;

• step-up;

• high yield, etc.
Terms from the same category