Investing in Certificates of Deposits (Cds)

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Certificates of deposits (CDs) are bound and transferable securities that give the holder the right to repayment of principal plus interest. They have a duration ranging between three months to five years and can be fixed or variable.

Interest is normally paid through the coupons, however, there are also certificates that are signed at a discount and repaid at par, and the capital is normally repaid at maturity.

CDs with maturity of less than eighteen months may not be repaid before the end of term (those with a maturity of eighteen months may be reimbursed at least eighteen months from issue).

If the fluctuation in market rates for current coupons, and all the coupons under the CD fixed rate remains constant, an additional risk to the bank grows.

The risk of destruction, loss or theft is actually present only if the certificate is held by the holder, that risk is void if the certificate is deposited in securities portfolios.

Deposit certificates state that the bank reserves the right to free funds and to evaluate the contribution, provided that the deposit is transferable and bears interest. The bank issuing this certificate, undertakes to pay the certificate holder, the CD’s true value including interest

Despite the nature of the deposit certificate, whose purpose is the capacity of financial institutions to have a client’s funds in a clearly specified time, each certificate holder has the option of early redemption of their funds or even cancellation of the account. As can be expected, this entails substantial penalties imposed by the bank.

Certificates of deposit should also include:

    – The level of interest, respectively, the exact calculation (if the determination is somewhat complicated, as with the case of variable interest)
    – Conditions of payment of interest (clearly specify whether at the end of the period or during the validity of the certificate in several installments)
    – The right of of client for early withdrawal

    – Financial institutions in turn may book a maximum time limit for issue of invested funds by requesting a premature withdrawal
    – The penalty for early withdrawal or other violation of the certificate of deposit (perhaps also depending on the time elapsed from the issuance of a certificate, respectively. With or without agreement of payment and the amount of interest on premature withdrawal)
    – Bank charges, binding specifically with the issue of certificates of deposit and client’s account
    – Opportunities or conditions of automatic certificate renewal for a further period after the expiry of validity

Depositary receipts are part of the monetary aggregate M2, like bonds. There are categories of so-called Jumbo CDs, starting from the order of $100,000. Depositary receipts constitute larger deposits and may be in paper form, in other cases there may serve only as evidence in the book depository receipts records.

Depositary receipts are among the safest investments available in terms of risks and enforcement. Even in case involving the bankruptcy of the issuing bank, in most countries the state guarantees customer’s deposits (e.g, Federal Deposit Insurance Corporation (FDIC)). The most common terms for the release of the deposit, which financial institutions offer are three to five years.



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