Certificate of Deposit (CD)

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Certificate of Deposit (CD)</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"><p class="word_list"> <a href="#certificate of deposit">certificate of deposit</a><p class="word_list"> <a href="#Domestic CDs">domestic CD</a><p class="word_list"> <a href="#Euro CDs">Euro CD</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"><p class="word_list"> <a href="#Foreign CDs">foreign CD</a><p class="word_list"> <a href="#term CDs">term CD</a><p class="word_list"> <a href="#Yankee CD">Yankee CD</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="left" id="table5"> <tr> <td width="300" height="14"><font size="2"> </font><font size="4"> </font></td> <td width="9" height="14"></td> </tr> <tr> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">A <b><a name="certificate of deposit">certificate of deposit</a></b> (CD) is a money market instrument issued by a depository institution as evidence of a time deposit. Small denomination certificates of deposit are issued to retail investors. In the United States, these usually are covered by deposit insurance. This article focuses on large-denomination certificates of deposit, which are issued to institutional investors for denominations generally exceeding <a href="../articles/currency_codes.htm">USD</a> 1.0<a href="../articles/mm.htm">MM</a>.</p> <p class="body">A certificate of deposit has a fixed <a href="../articles/coupon_bond.htm">term</a>. At the end of the term, the deposit is returned with interest. The vast majority of certificates of deposit have terms of under a year, with three months being typical. Certificates of deposit with terms of a year or more are called <b> <a name="term CDs">term CDs</a></b>. Terms of five years are not unheard of.</p> <p class="body">Most certificates of deposit credit a fixed rate of interest, but there are also <a href="../articles/floater.htm"> floating-rate</a> certificates of deposit. A fee must be paid to withdraw funds early. Because most certificates of deposit are negotiable, investors usually sell an unwanted certificate of deposit rather than pay a fee and withdraw the funds. To facilitate transferability, most certificates of deposit are issued in <a href="../articles/book_entry_registered_bearer_bonds.htm">bearer</a> form, but some are <a href="../articles/book_entry_registered_bearer_bonds.htm">registered</a>.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table6"> <tr> <td align="right" width="9"> </td> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body" style="margin-bottom: 24">Certificates of deposit fall into three general categories:</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="Domestic CDs">Domestic CDs</a></b> are issued within a country by a domestic bank or other depository institution.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="Foreign CDs">Foreign CDs</a></b> are issued within a country by a domestic branch of a foreign depository institution. For example, a <b><a name="Yankee CD">Yankee CD</a></b> is a CD issued in the United States by a foreign bank.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="Euro CDs">Euro CDs</a></b> are issued outside a country but are denominated in that country's currency.</p> <p class="body" style="margin-top: 24">Domestic and foreign CDs are subject to the regulations of the country in which they are issued. Euro CDs are not. For this reason, Euro CDs have historically offered slightly higher <a href="../articles/yield.htm">yields</a>.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="left" id="table7"> <tr> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">Yields for terms less than a year are quoted as <a href="../articles/compounding.htm">simple</a> interest rates. An actual/360 basis is used almost everywhere, but certificates of deposit denominated in British pounds are usually quoted on an actual/365 basis. Yields depend primarily on a certificate of deposit's term, the level of interest rates for the currency it is denominated in, and the <a href="../articles/credit_risk.htm">credit quality</a> of the issuer.</p> <p class="body">Depository institutions try to sell their certificates of deposit directly to investors. If their funding needs exceed their ability to directly market the certificates of deposit, they may also sell them to dealers, who then resell them. Dealers provide a secondary market in certificates of deposit. Brokers also arrange transactions. To preserve anonymity, inter-dealer transactions are often brokered.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table9"> <tr> <td width="100%"> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/bankers_acceptance.htm">bankers acceptance</a> An acceptance that has a bank as its drawee.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/basis_swap.htm">basis swap</a> A floating-for-floating interest rate or currency swap.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><span class="verdana10"><a href="../articles/cofi_index.htm"><strong style="font-weight: 400">COFI</strong></a></span><strong style="font-weight: 400"> Cost of Funds Index.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/commercial_paper.htm">commercial paper</a> Short-term promissory notes issued primarily by corporations.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/credit_risk.htm">credit risk</a> Risk</strong> due to uncertainty in a counterparty's ability to meet its obligations.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/discount_instrument.htm">discount instrument</a> A money market instrument that pays no coupons, matures for its face value, and is issued at a discount to its face value.</strong></p> <cop yrigh t( c)c ont i ngen cy anal y sis, 2 00 5> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/discount_yield.htm">discount yield</a> A formula for calculating yield on a discount instrument.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/fed_funds.htm">Fed funds</a> Deposits held by US banks in accounts at their regional Federal Reserve banks.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/interest_rate_swap.htm">interest rate swap</a> A swap under which both cash flow streams are in the same currency and are defined as cash flow streams that might be associated with some fixed income obligations. <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/fixed_income_term_structure.htm">fixed income term structure</a> Refers collectively to a spot curve, forward curve, discount curve, yield curve or any other curve that describes the time value of money.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/floater.htm">floater</a> A fixed income instrument whose coupon fluctuates with some designated reference rate.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/interest_rate_spreads.htm">interest rate spreads</a> Spreads between interest rates.</strong><p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/libor.htm">Libor</a> London Interbank Offered Rate.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/medium_term_note.htm">medium-term note</a> A debt security issued through shelf-registration under US law.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/repo.htm">repurchase agreement</a> An agreement to sell and subsequently repurchase a security.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_bill.htm">Treasury bill</a> US Treasury security with with a maturity of a year or less at the time of issue.</p> </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_2.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%">  <p class="ad_legend" style="margin-left: 0; margin-bottom:2"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font color="#000000">Ads by Contingency Analysis</font></a></p> <p style="margin-top: 0; margin-bottom: 0"> <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=iframe" style="margin: 0px; padding: 0px; border-width: 0px" width="336" height="265" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" name="I1"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=336x265;setID=82436"> <img src="http://servedbyadbutler.com/adserve.ibs/;ID=147917;size=336x265;setID=82436;type=img" border="0" height="265" width="336" alt=""></a> </noscript><![endif]></iframe>   </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Books</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table10"> <tr> <td width="100%"> <p class="explanatory_text">Fabozzi, Mann and Choudhry (<a target="_blank" href="http://www.riskbook.com/link/fabozzi_mann_choudhry_(2002).htm">2002</a>) is an introduction to the money markets that discusses certificates of deposit.</p> <table border="0" cellpadding="4" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="100" align="left" valign="top"> <map name="FPMap370"> <area target="_blank" href="http://www.riskbook.com/link/fabozzi_mann_choudhry_(2002).htm" shape="rect" coords="0, 0, 82, 124"> </map> <img border="0" src="../images/book_fabozzi_mann_choudhry_(2002)_125.gif" usemap="#FPMap370" width="83" height="125"></td> <td align="left" valign="top"> <table border="0" cellpadding="1" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table12"> <tr> <td width="90%" colspan="3"> <p class="title"> <a target="_blank" href="http://www.riskbook.com/link/fabozzi_mann_choudhry_(2002).htm"> The Global Money Markets</a></td> </tr> <tr> <td colspan="3"> <p class="author"><b>F. Fabozzi, S. Mann and M. Choudhry</b></td> </tr> <tr> <td width="10%"> <map name="FPMap355"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/star_5.gif" usemap="#FPMap355" width="90" height="16"></td> <td width="10%" class="author">quality</td> <td width="70%"> <p class="author"> </td> </tr> <tr> <td width="10%"><map name="FPMap39"> <area target="_blank" href="http://www.riskbook.com/main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/tech_2.gif" usemap="#FPMap39" width="90" height="16"></td> <td width="10%" class="author">technical</td> <td width="70%">  </td> </tr> <tr> <td width="10%"> <p class="author">2002</td> <td width="10%"> </td> <td width="70%"> <p align="center"><map name="FPMap371"> <area target="_blank" coords="0, 0, 145, 19" shape="rect" href="http://www.riskbook.com/link/fabozzi_mann_choudhry_(2002).htm"> </map> <img border="0" src="../images/pointer_review.gif" usemap="#FPMap371" width="146" height="20"></td> </tr> </table> </td> </tr> </table> </td> </tr> </table> </td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table13"> <tr> <td width="100%" bgcolor="#FFFFFF"> <p align="center"><map name="FPMap365"> <area target="_top" href="http://www.riskglossary.com" shape="rect" coords="0, 0, 164, 102"> </map><img border="0" src="../images/logo.jpg" usemap="#FPMap365" width="165" height="103"></p> <p align="center"><span class="verdana10"> <a href="http://www.riskglossary.com/main/disclaimer.htm" target="_self"> Disclaimer</a></span></p> <p align="center">website: <span class="verdana10"> <a target="_top" href="http://www.contingencyanalysis.com"> http://www.contingencyanalysis.com</a></span><br> glossary direct link: <span class="verdana10"> <a target="_top" href="http://www.riskglossary.com"> http://www.riskglossary.com</a></span><br> copyright © Contingency Analysis, 2004</td> </tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div> </body>