Certificate of Deposits
CDs or Certificates of Deposits are Financial Instruments.
CERTIFICATES OF DEPOSIT
What do CDs actually mean?
Who issues them??
Who subscribes to them???
CERTIFICATES OF DEPOSIT
- Sunil wishes to borrow Rs. 40 Lakhs for his new business venture.
- He goes to his bank to ask for a loan.
- But though the bank agrees to provide a loan, it realizes that it has only Rs. 30 lacs at present.
- Now the bank does not wish to lose him to another bank.
- So the bank asks him to come back later to collect the loan amount.
CERTIFICATES OF DEPOSIT
So how does the bank provide the additional Rs.10 lakhs?
CERTIFICATES OF DEPOSIT
- The bank has corporate relationships from whom they can borrow.
- In order to borrow, they issue ‘Certificates of Deposit’ to these corporate relationships.
- Obviously the rate of interest offered by the bank to the corporate institutions would be higher than regular fixed deposits.
- Thus money comes into the bank and is in turn offered to Sunil.
CERTIFICATES OF DEPOSIT
- CDs, thus, become the financial instrument issued by banks at a higher interest rate than Fixed Deposits to entice corporates to park money with them in order to meet a lending need.
- A CD bears:
- a maturity date, generally range for 7 days to onr year. Financial Institution’s can issue CD’s for a period not less than one year and not exceeding 3 years from the date of issue.
- a specified interest rate, and
- can be issued for Rs.1 lakh and in multiple of
Rs.1 Lakh thereafter.
CERTIFICATES OF DEPOSIT
To Sum Up
- CD’s are a negotiable money market instrument and issued in dematerialized form or as a promissory note against funds deposited at a bank.
- CD’s can be issued by scheduled commercial banks and financial institutions permitted by Reserve Bank of India.
- CD’s are rated by approved rating agencies. (Example- CARE, ICRA, CRISIL and FITCH)