Certificate of deposits

Meaning
These are another money market instrument introduced by RBI in1989 . CD is marketable document of title to a deposit of a bank or any other institution . It is simply a receipt given to the depositor by a bank or any other institution for funds deposited with it . It has a maturity date and bears an interest rate on it .

Features
Nature of CD s They are governed by the negotiable instrument and transferable by endorsement Size Minimum amount of a CD should be 1 lakh i,e,the minimum deposit that could be accepted from a single subscriber should not be less than rs 1 lakh and in multiples of 1 lakh Maturity period The minimum and maximum maturity period is between 7 days and 12 months Issuers of certificate of deposits CDs can be issued by the scheduled commercial banks and financial institutions Buyers of the certificate of deposits CDs can be issued to individuals , companies , trust funds, associations etc

The yield on certificate of deposits

Formula ER = [(1+D)t-1]

100
100*T

where ER = effective rate of interest D= discount rate T= Maturity period is expressed as no of months in a year divided by maturity period in months

Advantages
Safe short term investment Highly liquid Helps the banks to maintain their share in the financial market Availability of secondary market

Developments in certificate of deposits market

Reduction in minimum maturity period of CDs from 15 to 7 days Reduction in the amount of issue Reduction in stamp duty on CDs effective from 1 march 2004 Withdrawal of tax deduction at source Issuing dematerialized form Disallowing premature closure of deposits under CDs