Certificate of Deposit – Peculiarities, Types, Pros and Cons

certifcate of depositA certificate of deposit (CD) is a security that certifies the depositor’s rights to get the inject capital and accrued charges at the end of the validity period.

The difference between a savings certificate and a certificate of deposit is that the first one is released for individuals, the second one is released for legal enterprises. In all other relations, these securities are completely similar.

A deposit is a contract. The certificate is a security. It is the transformation of assets, in the process of which money turns into short-term or long-term financial investments.


Who issues certificates of deposit?

Banks that meet a number of mandatory requirements:

  • continuous functioning – at least for two years;
  • the reported annual accounts must be verified by auditors;
  • the bank must meet the strict regulations and requirements.

The terms for the certificates’ release are not complicated. The issue registration procedure is not mandatory. The bank defines the terms and circulation found on its own strategy. There is a strict formed process of coordination and approval of all requirements. In practice, this implies that certificates of deposit are a simple, quick and less costly procedure.

Who can be the CD owner?

CD owner is a legal entity or state facilities operated on the territory of the United States.

Can I pay with certificate of deposit?

No, I can’t. It is not possible to pay with this certificate for goods, for example.

What is the term of validity?

The validity period of certificates of deposit is specified by the issuing bank. According to the laws, it cannot be over 1 year (for savings – up to 3 years). The extension is not possible. At the end of the term, it is transformed into a demand deposit.


Like a bank deposit, a personal certificate of deposit is connected to a specific legal entity. But, unlike a deposit, it can still change its owner. To do this, you will have to sign an assignment agreement.

The holder certificate is transferred to third parties without any restrictions. Actually, it is holder securities that form a separate sector of the market, providing investors with additional investment opportunities.

Where can I cash out a certificate?

Every holder may cash out a certificate in any department of the issuing bank. This is a very significant advantage over time deposits.

Pros and cons

A certificate of deposit unites the properties of securities and time deposits:

  • high degree of reliability and riskless;
  • the certificate is released with a fixed interest rate. It is impossible to alter the interest rate by the issuing bank;
  • free use. You can sell, cut up, donate. You can leave it as a pledge, for example, when issuing a bank loan. Remember that this often contributes to lower interest rates.;
  • can be presented for repurchase at any issuer’s department.

From another point of view, by analogy with other financial instruments, a certificate of deposit has its drawbacks:

  • replenishment of interest is not ensured, since the rate is fixed;
  • security. The certificate can simply be stolen. In this case, the certificate holders have great risks.;
  • the non-cash operation for all settings related to the purchase/trade somewhat limits their turnover and validity;
  • you will not get insurance compensation. All financial claims will be considered on a first come, first served basis. Please note: the holders of registered securities are insured;
  • Not fit for speculative investments;
  • Taxed income.
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