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