Certificates of Deposit
receipt for the deposit of funds in a bank.
Certificates of deposit (CDs) are of several types:
Demand CDs are non-interest bearing and payable on demand; they
are used mainly as a guarantee of payment - for example, as lottery prizes.
CDs are interest bearing and may range in maturity from 30 days to several
years; denominations vary from less than $1,000 (individual CDs) to more
than $100,000 (institutional CDs); the very large denominations may be
negotiable and, properly endorsed, may serve as security for loans.
Zero-rate CDs are sometimes used in lieu of compensating balances
because of their lower reserve requirements.
CDs. Variable-rate CDs
were instituted in 1973; their interest rate is tied to the 90-day CD
rate and is adjusted every 90 days.
Variable interest plus CDs were discontinued in 1981; their interest
rate was tied to the weekly auction of six-month Treasury bills, and they
could be used as collateral for short-term loans.
are required to keep reserves against demand and time CDs corresponding
to the reserves for demand and time deposits, respectively.
certificates of deposit were subject to Regulation Q interest rate ceilings,
but in 1970, to curb the outflow of deposits when market interest rates
exceeded ceiling rates, the ceiling on CDs of $100,000 or more and of
less than 90 days' maturity was removed; in 1973, the ceiling rates on
all such large CDs was eliminated; and in 1986, pursuant to the schedule
set by the DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT
OF 1980, deposit interest rate ceilings on all time and savings deposits
No-penalty CDs let investors make withdrawals at any time or at
set intervals. Federal law
no longer requires financial institutions to charge for early withdrawals
of principal but are allowed to deduct one to three months' interest on
CDs of one year or less, three to six months' interest on longer terms.
Rising-rate CDs pay a continually higher rate each time they are
rolled over during a specified term, e.g., every six months over a period
of three years.
Yields are tied to the stock market.
A "bull" version allows the investor to bet on a market rise; a
"bear" version allows for a bet on a market decline.
CDs obtained from a stockbroker instead of from a bank or S&L.
Brokered CDs are traded on secondary markets, which gives the investor
the option to sell without penalty before the CD matures.
CDs were marketed by