Certificates of deposit (CDs) are the same term deposits but issued in the form of a security on a special form.
In short, a CD is very similar to the usual bank deposit without the right to replenish and withdraw. You bring money to the bank, and after a while you take it with interest. The deposit account cannot be opened. Instead, the client is given a beautiful colored form of the certificate, which at the time of redemption must be exchanged at the cash desk for money.
Banks issue two types of certificates:
- Nominal CD. The name of a specific owner is entered into the form, and only this person can cash out the security. By the way, such certificates participate in the general deposit insurance system;
- Bearer CD. The certificate can be transferred, sold or sold to another person like regular money. However, in case of revocation of the bank’s license, it is practically impossible to return the money invested in such a certificate.
A bit of history
CDs are documentary evidence of bank deposits that are used in financial transactions.
The security was developed as an intermediate variant of a fixed-term bank deposit with higher liquidity since certificates can be used in financial transactions in the market.
Subsequently, the type of securities was officially recognized and legislatively enshrined at the state level in different countries.
A variety of documents appeared on the financial markets in the United States in the middle of the 20th century. At the end of the 60s. the new instrument was recognized in the UK markets, and subsequently, a variety of valuable assets spread to other countries.
Features of CDs
The common features of certificates of deposit:
- these are securities;
- provided only by banks;
- regulated by banking legislation;
- issued in documentary form;
- imply the transfer of rights to other persons;
- cannot be a settlement and payment instrument for goods and services;
- issued only to residents of the U.S.
Mandatory details of the CD form
We list the required details of the certificate of deposit form:
- name (heading) “Certificate of Deposit”;
- series and number;
- reason for issue;
- date of making the deposit;
- the size of the issued deposit (the amount of the deposit);
- the unconditional commitment of the bank to return the amount deposited;
- date of certificate maturity (date of the claim by the beneficiary of the amount under the certificate);
- the interest rate for using the deposit;
- the amount of accrued (due) interest;
- the rate in case of early demand;
- name and address of the issuing bank and (for a registered certificate) beneficiary. Contact information, bank details and correspondent account number with the bank;
- for a personalized certificate: the name and contact details of the depositor.
Also, the certificate of deposit must contain all the required signatures and seals.
Note that the certificate of deposit is considered invalid in the absence of any of the specified details.
If a business transaction is carried out with a paper that is not fixed by parameters and conditions, it is considered invalid.
Forms for securities are issued only by specialized printing companies licensed to issue. From this point of view, the document has a high degree of security, and it is almost impossible to forge it.
Pros of CDs
At first glance, there are no advantages to such a “deposit”, but let’s figure it out better.
- Profit is higher than on bank deposits. The average difference is 1-2%;
- Security. When “printing” forms on special equipment, a bunch of security technologies are used. It is almost impossible to forge such a security;
- A certificate of deposit can be transferred, sold, bequeathed or gifted an infinite number of times;
- The security belongs to one owner (its value is not taken into account when the property is divided!);
- It can be used as collateral for loans. Such collateral in banks is considered reliable and liquid;
- The certificate can be redeemed at any branch of the issuing bank without reference to a specific address.
Cons of CDs
CDs also have shortcomings:
- The interest rate is fixed for the entire duration of the certificate. The value of a security does not change over time (unlike stocks or currencies). Therefore, certificates of deposit are not suitable for speculative investments;
- The certificate of deposit cannot be used as a “piggy bank” – it does not provide for either replenishment or partial withdrawal of fund;
- If you lose the form, the document can be restored only through the court – it is long and troublesome;
- Bearer certificates of deposit do not participate in the deposit insurance system. If the bank’s license is revoked, the money cannot be returned;
- Bearer certificates can be stolen like regular money and cashed by intruders.
A certificate of deposit is a good way to temporarily store an organization’s funds. Firstly, the funds are protected from inflation processes. Secondly, the company can receive additional income and, if necessary, sell the certificate on the securities market.