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Certificate of Deposit 56

Certificate of Deposit 56

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Published by: bhaskaranbalamurali on Sep 01, 2010
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04/07/2011

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Introduction
A
certificate of Deposit
or 
CD
is atime deposit, a financial product commonly offered toconsumers by banks,thrift institutions, andcredit unions. A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rateand can be issued in any denomination. A certificate of deposit, or CD, is aninterest- bearing deposit account. However, unlike asavingsdeposit account in which theinterest  ratemay fluctuate, a CD investment is guaranteed a specific rate of return. The interestrate on a CD is higher than on a savings account because the investor, in exchange for receiving a guaranteed rate of return, commits to a specified period of time (the "term")during which he will not withdraw his investment. Common terms for CDs range from 30days to 5 years. With most CDs, withdrawing any of the investment before the end of theterm (the "maturitydate") will incur an often substantial early withdrawal penalty.
Certificates of Deposit in India
CDs are negotiable money market instrument issued in demat form or as a UsancePromissory Notes. CDs issued by banks should not have the maturity less than seven daysand not more than one year. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years.CDs are like bank term deposits but unlike traditional time deposits these are freelynegotiable and are often referred to as Negotiable Certificates of Deposit. CDs normallygive a higher return than Bank term deposit. CDs are rated by approved rating agencies(e.g. CARE, ICRA, CRISIL, and FITCH) which considerably enhance their tradability inthe secondary market, depending upon demand.
 
CERTIFICATE OF DEPOSITS
This scheme was introduced in July 1989, to enable the banking system to mobilise bulk deposits from the market, which they can have at competitive rates of interest.The major features are:
Who can issue
Scheduled commercial banks (except RRBs) and All India FinancialInstitutions within their `Umbrella limit’.
CRR/SLR 
Applicable on the issue price in case of banks
Investors
Individuals (other than minors), corporations, companies, trusts, funds,associations etc
Maturity
Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum3 years).
Amount
Min: Rs.1 lac, beyond which in multiple of Rs.1 lac
Intt. rate
Market related. Fixed or floating
Loan
Against collateral of CD not permitted
Pre-mature cancellation
 Not allowed
Transfer Endorsement & delivery.
Any time
Nature Usance Promissory note.
Can be issued in Dematerialisation form only onlywef June 30, 2002
Other conditions
• If payment day is holiday, to be paid on next preceding business day• Issued at a discount to face value• Duplicate can be issued after giving a public notice & obtaining indemnity
Features of CD
All scheduled banks (except RRBs and Co-operative banks) are eligible to issueCDs.
They can be issued to individuals, corporations, trusts, funds and associations.
 NRIs can also subscribe to CDs, but on non-repatriable basis only. In secondarymarket such CDs cannot be endorsed to another NRI.
 
They are issued at a discount rate freely determined by the issuer and themarket/investors.
CDs issued in physical form are freely transferable by endorsement and delivery.Procedure of transfer of dematted CDs is similar to that of any other dematsecurities.
For CDs there is no lock-in period.CDs are issued in denominations of Rs.1 Lac and in the multiples of Rs. 1 Lac thereafter.Discount/Coupon rate of CD is determined by the issuing bank/FI.Loans cannot begranted against CDs and Banks/FIs cannot buy back their own CDs before maturity.SBIDFHI Limited, participates in both the Primary and Secondary Market for CDs.
Tips to Buying a Certificate of Deposit (CD)
The following tips can help you decide on a certificate of deposit:
Consider your financial goals: The basic recipe for a successful investment is aclear vision of your financial target and risk appetite. Apart from CDs, there arevarious options for diversifying your investment portfolio, such as saving depositsand treasury bills. Consider all available options before making a decision.Typically, CDs offer a fixed interest rate for the entire term of the investment.Thus, the biggest risk factor in opting for a CD isinflation, which can erode the purchasing power of the total returns from this investment option.
Consider the maturity time: You money will be locked till the CD matures. So,ensure that you do not need thefunds.
Consider the rate of interest: Confirm whether the CD offers a simple or acompounded rate of interest. In case it is a compounded rate, find out whether it iscompounded quarterly or annually.
Check whether the CD is callable: Banking institutions reserve the right to call aCD, if the prevailing interest rates are at record low levels. In such a situation, youwill receive the entire principal amount in addition to the interest accrued till the

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