Negotiable Certificate Of Deposit

Negotiable Certificate of Deposit (NCD) Details. Product Feature. NCD is a time deposit type financial product which is issued by discounting interest on deposit in advance and can.

Jumbo CDs are also known as negotiable certificates of deposits and come in bearer form. These work like conventional certificate of deposits that lock in the principal amount for a set timeframe and are. LTNCD or Long Term Negotiable Certificate of Deposit is a bank product issued by local banks and offered to investors looking for a relatively safe investment asset. Compared to a regular savings account or short-term time deposit. A Negotiable Certificate of Deposit (NCD) is a short-term interest bearing debt issued by the National Bank of Cambodia. It is issued in Khmer riel and U.S. Dollar in order to help commercial banks. A negotiable certificate of deposit (NCD) is a certificate of deposit issued by the banks and it is freely negotiable unlike non-negotiable CDs which cannot be transferred, sold, bought, or exchanged.

NEGOTIABLE CERTIFICATES OF DEPOSIT: A PRIMER
By AP Faure

Definition
negotiable certificate of deposit, usually abbreviated to NCD, is a fixed deposit receipt issued by a bank that is negotiable in the secondary market for financial assets. The issuing bank undertakes to pay the amount of the deposit plus the interest on maturity date (in the case of short term NCDs), or interest six-monthly in arrears and the deposit amount on maturity (in the case of long NCDs). An NCD certificate contains the following information:

• Name of issuing bank
• Issue date
• Maturity date
• Amount of the deposit
• Rate of interest per cent per annum
• Maturity value (amount of the deposit plus interest) in the case of short NCDs
• Interest dates (in the case of long NCDs)

Historical background
The United States was the first country to create NCDs, and this took place in February 1961. As far as can be ascertained, South Africa was the second country to issue NCDs, and the first issue was made in July 1964. The first English issue took place on 28 October 1968. Building societies first issued NCDs in South Africa on 12 October 1983.

A joint press statement of the four large banks was released on 21 July 1964 regarding the introduction of NCDs from 22 July. The first issuers were Barclays Bank DCO (now First National Bank) and the Netherlands Bank (later Nedbank and now Nedcor Bank). The exact date of the first issue is not known, but it was within days of the press release. Barclays Bank issued their first NCD on 25 July 1964 (see accompanying image).

The discount houses played a major role in the NCD market from its inception. Banking correspondence reveals that the two discount houses in existence in 1964 were approached by the first issuers to act as brokers and market makers in NCDs.

Purpose of issue
As the name of the instrument hints, NCDs are deposits for fixed periods that are negotiable. Thus, a NCD is issued in exchange for a deposit, ie it is an evidence of a deposit. The fact that it is negotiable makes it an attractive instrument for investors, ie investors are not locked into the deposit.

This instrument is available only in large denominations, ie R1 million and above, and this renders it a 'wholesale' instrument. Thus the primary (and secondary) market is limited to the large investors.

Legal environment
NCDs are common law instruments, ie there is no specific law that provides for and regulates NCDs. However, the Regulations under the Banks Act 94 of 1990 limits the term of the instrument, and the amount which banks may issue. In summary:

• NCDs may not be issued for periods of longer than 3 years, unless the Registrar grants authorisation in writing
• Total NCDs issued may not exceed 30% of the total amount of liabilities to the public
• NCDs with maturity of 12 months or less may not exceed 20% of liabilities to the public

NCDs do not rank as liquid assets for banks, and they are not eligible for use as repo assets with the Reserve Bank.

Characteristics
In South Africa a standard set of conditions applies to the issue of NCDs. These are found on the reverse of the certificate.

As noted, NCDs may be issued for periods of up to three years (unless the Registrar of Banks has authorised a deviation from the Regulations). When issued for periods of less than one year, interest is usually payable at the end of the period. When issued for longer than one year, interest may be payable either at the end of the period or six-monthly in arrears, but usually the latter. NCDs are also issued at variable rates, usually with reference to some benchmark rate.

NCDs are usually issued in bearer form (ie not payable to any particular person), and only occasionally in the name of the depositor. In this case the endorsement of the investor is required for transfer.

NCDs may be issued in any amount, but are usually issued in denominations of R1 million. At times a bank may issue denominations of R500 000 and even R100 000 but only when part of a larger parcel.

Banks are willing to split larger denomination NCDs into smaller denominations.

Amount in issue
Between the first issue in 1964 and the first quarter of 1965 the total amount of NCDs issued grew slowly, ie up to R3 million, and stood at only R104 million at the end of 1967. It was after this period that NCDs issued grew rapidly, the amount of R2 billion being first breached in 1982.

Since 1969 total NCDs issued has kept pace with the growth in bank deposits and as a ratio thereof has fluctuated between 10% and 20%. The amount outstanding for banks was approximately R28 billion at the end of 1991, and approached R90 billion ten years later.

Of all the money market instruments, NCDs have the largest market capitalisation (outstanding amount). The chart below shows NCDs outstanding as a ratio of deposits.

Primary market
Demand for NCDs arises from a wide array of institutions including money market funds, banks other than the issuer, mining houses, pension funds, insurance companies, cash-rich commercial and industrial companies, and high net-worth individuals.

These instruments are available across the full maturity spectrum and quality spectrum. Banks are willing to tailor maturity dates to meet the needs of investors. NCDs offer the same security as a term deposit with the bank in question, but are fully negotiable before the date of maturity.

Not all banks are able to issue NCDs at the same rate. The rates payable depend on the rating of the bank by a recognised rating agency. The smaller banks have difficulty in issuing NCDs.

The method of issue of NCDs could be called 'pro-action and re-action'. Banks (via their treasury divisions) are in daily contact with the larger investors and endeavour to market their NCDs to cover maturities and to accommodate new funds available. The banks also respond to contact initiated by investors.

Ownership distribution
No statistics on ownership distribution are available in South Africa at present, but they are held by the same institutions that are involved in the primary market, as mentioned above. The main holders tend to be the financial intermediaries, particularly pension funds, money market funds and insurance companies. Cash-rich companies, such as mining houses, are also large investors.

Secondary market
An NCD issued to bearer is transferable by delivery alone. If an NCD is issued repayable to a particular depositor, it is transferable by delivery plus the endorsement on the reverse of the certificate. The endorsement may be in blank or to order.

A secondary market in NCDs is 'made' by the larger banks themselves in their own paper. This means that they are prepared to quote firm buying and selling rates, for immediate settlement, on their own NCDs, and in amounts of R20-30 million. They are usually only prepared to make a market in NCDs with a currency of up to one year.

The discount houses were prepared to make a market in all prime NCDs during the period of their existence, from 1957 to 1992. No institution, other than the banks, at this stage is prepared to make a market in all NCDs.

The main participants in the secondary market are the money market funds, the pension funds, insurance companies and mining houses.

Issue and dealing mathematics
The NCD, which is simply a fixed deposit that is negotiable, is the most issued and traded money market instrument in the South African money market. NCDs are issued in a number of ways and different mathematics applies in each case. The most 'common' type of NCD is one with a tenor of less than one year where the amount invested (deposited) is given (for example R1 million) and where interest is payable at maturity.

At issue the typical simple interest calculation is involved, as follows:

FV = PV [1 + (ir x t)]

where

PV = present value (amount of deposit)
FV = future value (PV + the interest amount)
ir = interest rate negotiated
t = term of deposit in days, expressed as t / 365.

An example will make this clear:

PV = R1 000 000
ir = 9.8% pa
t = 180 / 365

The maturity value (MV), which is the FV, is calculated by the deposit-taking bank and placed on the certificate:

Maturity value (FV) = PV [1 + (0.098 x 180/365)]
= R1 000 000 (1.04832877)
= R 1 048 328.77.

When NCDs are traded in the money market, the 'givens' are:

• The maturity value (MV or FV)
• The maturity date
• The settlement date
• The rate at which the trade takes place.

These variables are used to calculate the consideration, ie the amount to be paid by the purchaser (or received by the seller). The consideration is nothing else but the PV. The formula used in secondary market trades is as follows:

PV = FV / [1 + (ir x t)].

An example will be useful. A company would like to invest an amount close to R1 million and approaches its broker in this regard. The broker makes a few phone calls and offers the investor a NCD with the following characteristics:

Maturity value (FV) = R1 054 246.58 (this was calculated at issue)
Maturity (due) date = 20 June 2002
Date of transaction = 21 January 2002
t = 150 / 365 (ie 21 January to 20 June)
Rate traded at (ir) = 9.2% pa.

The investor accepts the deal and the consideration is calculated:

Consideration (PV)
= R1 054 246.58 / [1 + (0.092 x 150/365)]
= R1 054 246.58 / 1.03780822
= R1 015 839.50.
Money quiz game.

Payment on maturity date
On maturity date the holder of an NCD presents the certificate to the issuing bank, which issues a cheque for the face value plus the accrued interest, ie the maturity value. NCDs are in the process of being dematerialised, and when complete ownership will be evidenced by an electronic entry in the books of the central scrip depository (CSD - to be STRATE) and in the books of the relevant central scrip depository participant (CSDP). Payment will be automatic and electronic to the holder on maturity.

A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions. CDs differ from savings accounts in that the CD has a specific, fixed term (often one, three, or six months, or one to five years) and usually, a fixed interest rate. The bank expects CD to be held until maturity, at which time they can be withdrawn and interest paid.

Like savings accounts, CDs are insured 'money in the bank' (in the US up to $250,000) and thus, up to the local insured deposit limit, virtually risk free. In the US, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.

In exchange for the customer depositing the money for an agreed term, institutions usually offer higher interest rates than they do on accounts that customers can withdraw from on demand—though this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid-2004, interest rates were expected to rise—and many banks and credit unions began to offer CDs with a 'bump-up' feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, financial institutions introduce CDs indexed to the stock market, bond market, or other indices.

Some features of CDs are:

• A larger principal should/may receive a higher interest rate.
• A longer term usually earns a higher interest rate, except in the case of an inverted yield curve (e.g., preceding a recession).
• Smaller institutions tend to offer higher interest rates than larger ones.
• Personal CD accounts generally receive higher interest rates than business CD accounts.
• Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.

CDs typically require a minimum deposit, and may offer higher rates for larger deposits. The best rates are generally offered on 'Jumbo CDs' with minimum deposits of $100,000. Jumbo CDs are commonly bought by large institutional investors, such as banks and pension funds, that are interested in low-risk and stable investment options. Jumbo CDs are also known as negotiable certificates of deposits and come in bearer form. These work like conventional certificate of deposits that lock in the principal amount for a set timeframe and are payable upon maturity. ^[1]

The consumer who opens a CD may receive a paper certificate, but it is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements. That is, there is often no 'certificate' as such. Consumers who want a hard copy that verifies their CD purchase may request a paper statement from the bank, or print out their own from the financial institution's online banking service.

Closing a CD[edit]

Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of up to twelve months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity—unless the holder has another investment with significantly higher return or has a serious need for the money.

Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or 'rolling it over' (depositing it into a new CD). Generally, a 'window' is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened not to roll over the CD).

CD refinance[edit]

The Truth in Savings Regulation DD requires that insured CDs state, at time of account opening, the penalty for early withdrawal. It is generally accepted that these penalties cannot be revised by the depository prior to maturity.^{[citation needed]} However, there have been cases in which a credit union modified its early withdrawal penalty and made it retroactive on existing accounts.^[2] The second occurrence happened when Main Street Bank of Texas closed a group of CDs early without full payment of interest. The bank claimed the disclosures allowed them to do so.^[3]

The penalty for early withdrawal deters depositors from taking advantage of subsequent better investment opportunities during the term of the CD. In rising interest rate environments, the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. Added interest from the new higher yielding CD may more than offset the cost of the early withdrawal penalty.

Ladders[edit]

While longer investment terms yield higher interest rates, longer terms also may result in a loss of opportunity to lock in higher interest rates in a rising-rate economy. A common mitigation strategy for this opportunity cost is the 'CD ladder' strategy. In the ladder strategies, the investor distributes the deposits over a period of several years with the goal of having all one's money deposited at the longest term (and therefore the higher rate) but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.

For example, an investor beginning a three-year ladder strategy starts by depositing equal amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From that point on, a CD reaches maturity every year, at which time the investor can re-invest at a 3-year term. After two years of this cycle, the investor has all money deposited at a three-year rate, yet have one-third of the deposits mature every year (which the investor can then reinvest, augment, or withdraw).

The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank. This can be advantageous, as smaller banks may not offer the longer terms of some larger banks. Although laddering is most common with CDs, investors may use this strategy on any time deposit account with similar terms.

Step-up callable CD[edit]

NCDs are usually issued in bearer form (ie not payable to any particular person), and only occasionally in the name of the depositor. In this case the endorsement of the investor is required for transfer.

NCDs may be issued in any amount, but are usually issued in denominations of R1 million. At times a bank may issue denominations of R500 000 and even R100 000 but only when part of a larger parcel.

Banks are willing to split larger denomination NCDs into smaller denominations.

Amount in issue
Between the first issue in 1964 and the first quarter of 1965 the total amount of NCDs issued grew slowly, ie up to R3 million, and stood at only R104 million at the end of 1967. It was after this period that NCDs issued grew rapidly, the amount of R2 billion being first breached in 1982.

Since 1969 total NCDs issued has kept pace with the growth in bank deposits and as a ratio thereof has fluctuated between 10% and 20%. The amount outstanding for banks was approximately R28 billion at the end of 1991, and approached R90 billion ten years later.

Of all the money market instruments, NCDs have the largest market capitalisation (outstanding amount). The chart below shows NCDs outstanding as a ratio of deposits.

Primary market
Demand for NCDs arises from a wide array of institutions including money market funds, banks other than the issuer, mining houses, pension funds, insurance companies, cash-rich commercial and industrial companies, and high net-worth individuals.

These instruments are available across the full maturity spectrum and quality spectrum. Banks are willing to tailor maturity dates to meet the needs of investors. NCDs offer the same security as a term deposit with the bank in question, but are fully negotiable before the date of maturity.

Not all banks are able to issue NCDs at the same rate. The rates payable depend on the rating of the bank by a recognised rating agency. The smaller banks have difficulty in issuing NCDs.

The method of issue of NCDs could be called 'pro-action and re-action'. Banks (via their treasury divisions) are in daily contact with the larger investors and endeavour to market their NCDs to cover maturities and to accommodate new funds available. The banks also respond to contact initiated by investors.

Ownership distribution
No statistics on ownership distribution are available in South Africa at present, but they are held by the same institutions that are involved in the primary market, as mentioned above. The main holders tend to be the financial intermediaries, particularly pension funds, money market funds and insurance companies. Cash-rich companies, such as mining houses, are also large investors.

Secondary market
An NCD issued to bearer is transferable by delivery alone. If an NCD is issued repayable to a particular depositor, it is transferable by delivery plus the endorsement on the reverse of the certificate. The endorsement may be in blank or to order.

A secondary market in NCDs is 'made' by the larger banks themselves in their own paper. This means that they are prepared to quote firm buying and selling rates, for immediate settlement, on their own NCDs, and in amounts of R20-30 million. They are usually only prepared to make a market in NCDs with a currency of up to one year.

The discount houses were prepared to make a market in all prime NCDs during the period of their existence, from 1957 to 1992. No institution, other than the banks, at this stage is prepared to make a market in all NCDs.

The main participants in the secondary market are the money market funds, the pension funds, insurance companies and mining houses.

Issue and dealing mathematics
The NCD, which is simply a fixed deposit that is negotiable, is the most issued and traded money market instrument in the South African money market. NCDs are issued in a number of ways and different mathematics applies in each case. The most 'common' type of NCD is one with a tenor of less than one year where the amount invested (deposited) is given (for example R1 million) and where interest is payable at maturity.

At issue the typical simple interest calculation is involved, as follows:

FV = PV [1 + (ir x t)]

where

PV = present value (amount of deposit)
FV = future value (PV + the interest amount)
ir = interest rate negotiated
t = term of deposit in days, expressed as t / 365.

An example will make this clear:

PV = R1 000 000
ir = 9.8% pa
t = 180 / 365

The maturity value (MV), which is the FV, is calculated by the deposit-taking bank and placed on the certificate:

Maturity value (FV) = PV [1 + (0.098 x 180/365)]
= R1 000 000 (1.04832877)
= R 1 048 328.77.

When NCDs are traded in the money market, the 'givens' are:

• The maturity value (MV or FV)
• The maturity date
• The settlement date
• The rate at which the trade takes place.

These variables are used to calculate the consideration, ie the amount to be paid by the purchaser (or received by the seller). The consideration is nothing else but the PV. The formula used in secondary market trades is as follows:

PV = FV / [1 + (ir x t)].

An example will be useful. A company would like to invest an amount close to R1 million and approaches its broker in this regard. The broker makes a few phone calls and offers the investor a NCD with the following characteristics:

Maturity value (FV) = R1 054 246.58 (this was calculated at issue)
Maturity (due) date = 20 June 2002
Date of transaction = 21 January 2002
t = 150 / 365 (ie 21 January to 20 June)
Rate traded at (ir) = 9.2% pa.

The investor accepts the deal and the consideration is calculated:

Consideration (PV)
= R1 054 246.58 / [1 + (0.092 x 150/365)]
= R1 054 246.58 / 1.03780822
= R1 015 839.50.
Money quiz game.

Payment on maturity date
On maturity date the holder of an NCD presents the certificate to the issuing bank, which issues a cheque for the face value plus the accrued interest, ie the maturity value. NCDs are in the process of being dematerialised, and when complete ownership will be evidenced by an electronic entry in the books of the central scrip depository (CSD - to be STRATE) and in the books of the relevant central scrip depository participant (CSDP). Payment will be automatic and electronic to the holder on maturity.

A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions. CDs differ from savings accounts in that the CD has a specific, fixed term (often one, three, or six months, or one to five years) and usually, a fixed interest rate. The bank expects CD to be held until maturity, at which time they can be withdrawn and interest paid.

Like savings accounts, CDs are insured 'money in the bank' (in the US up to $250,000) and thus, up to the local insured deposit limit, virtually risk free. In the US, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.

In exchange for the customer depositing the money for an agreed term, institutions usually offer higher interest rates than they do on accounts that customers can withdraw from on demand—though this may not be the case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various forms of variable rates. For example, in mid-2004, interest rates were expected to rise—and many banks and credit unions began to offer CDs with a 'bump-up' feature. These allow for a single readjustment of the interest rate, at a time of the consumer's choosing, during the term of the CD. Sometimes, financial institutions introduce CDs indexed to the stock market, bond market, or other indices.

Some features of CDs are:

• A larger principal should/may receive a higher interest rate.
• A longer term usually earns a higher interest rate, except in the case of an inverted yield curve (e.g., preceding a recession).
• Smaller institutions tend to offer higher interest rates than larger ones.
• Personal CD accounts generally receive higher interest rates than business CD accounts.
• Banks and credit unions that are not insured by the FDIC or NCUA generally offer higher interest rates.

CDs typically require a minimum deposit, and may offer higher rates for larger deposits. The best rates are generally offered on 'Jumbo CDs' with minimum deposits of $100,000. Jumbo CDs are commonly bought by large institutional investors, such as banks and pension funds, that are interested in low-risk and stable investment options. Jumbo CDs are also known as negotiable certificates of deposits and come in bearer form. These work like conventional certificate of deposits that lock in the principal amount for a set timeframe and are payable upon maturity. ^[1]

The consumer who opens a CD may receive a paper certificate, but it is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements. That is, there is often no 'certificate' as such. Consumers who want a hard copy that verifies their CD purchase may request a paper statement from the bank, or print out their own from the financial institution's online banking service.

Closing a CD[edit]

Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the loss of up to twelve months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw the money before maturity—unless the holder has another investment with significantly higher return or has a serious need for the money.

Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or 'rolling it over' (depositing it into a new CD). Generally, a 'window' is allowed after maturity where the CD holder can cash in the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD automatically, once again tying up the money for a period of time (though the CD holder may be able to specify at the time the CD is opened not to roll over the CD).

CD refinance[edit]

The Truth in Savings Regulation DD requires that insured CDs state, at time of account opening, the penalty for early withdrawal. It is generally accepted that these penalties cannot be revised by the depository prior to maturity.^{[citation needed]} However, there have been cases in which a credit union modified its early withdrawal penalty and made it retroactive on existing accounts.^[2] The second occurrence happened when Main Street Bank of Texas closed a group of CDs early without full payment of interest. The bank claimed the disclosures allowed them to do so.^[3]

The penalty for early withdrawal deters depositors from taking advantage of subsequent better investment opportunities during the term of the CD. In rising interest rate environments, the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the proceeds after paying the applicable early withdrawal penalty. Added interest from the new higher yielding CD may more than offset the cost of the early withdrawal penalty.

Ladders[edit]

While longer investment terms yield higher interest rates, longer terms also may result in a loss of opportunity to lock in higher interest rates in a rising-rate economy. A common mitigation strategy for this opportunity cost is the 'CD ladder' strategy. In the ladder strategies, the investor distributes the deposits over a period of several years with the goal of having all one's money deposited at the longest term (and therefore the higher rate) but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.

For example, an investor beginning a three-year ladder strategy starts by depositing equal amounts of money each into a 3-year CD, 2-year CD, and 1-year CD. From that point on, a CD reaches maturity every year, at which time the investor can re-invest at a 3-year term. After two years of this cycle, the investor has all money deposited at a three-year rate, yet have one-third of the deposits mature every year (which the investor can then reinvest, augment, or withdraw).

The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank. This can be advantageous, as smaller banks may not offer the longer terms of some larger banks. Although laddering is most common with CDs, investors may use this strategy on any time deposit account with similar terms.

Step-up callable CD[edit]

Step-Up Callable CDs are a form of CD where the interest rate increases multiple times prior to maturity of the CD. These CDs are often issued with maturities up to 15 years, with a step-up in interest happening at year 5 and year 10.^[4]

Typically, the beginning interest rate is higher than what is available on shorter-maturity CDs, and the rate increases with each step-up period.

These CDs have a 'call' feature which allows the issuer to return the deposit to the investor after a specified period of time, which is usually at least a year. When the CD is called, the investor is given back their deposit and they will no longer receive any future interest payments.^[5]

Because of the call feature, interest rate risk is borne by the investor, rather than the issuer. This transfer of risk allows Step-Up Callable CDs to offer a higher interest rate than currently available from non-callable CDs. If prevailing interest rates decline, the issuer will call the CD and re-issue debt at a lower interest rate. If the CD is called before maturity, the investor is faced with reinvestment risk. If prevailing interest rates increase, the issuer will allow the CD to go to maturity.^[6]

Deposit insurance[edit]

The amount of insurance coverage varies, depending on how accounts for an individual or family are structured at the institution. The level of insurance is governed by complex FDIC and NCUA rules, available in FDIC and NCUA booklets or online. The standard insurance coverage is currently $250,000 per owner or depositor for single accounts or $250,000 per co-owner for joint accounts.

Some institutions use a private insurance company instead of, or in addition to, the federally backed FDIC or NCUA deposit insurance. Institutions often stop using private supplemental insurance when they find that few customers have a high enough balance level to justify the additional cost. The Certificate of Deposit Account Registry Service program lets investors keep up to $50 million invested in CDs managed through one bank with full FDIC insurance.^[7] However rates will likely not be the highest available.

Terms and conditions[edit]

There are many variations in the terms and conditions for CDs

The federally required 'Truth in Savings' booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information^{[citation needed]}; only the written document carries legal weight. If the original issuing institution has merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed following the original terms of the contract.

• The terms and conditions may be changeable. They may contain language such as 'We can add to, delete or make any other changes ('Changes') we want to these Terms at any time.'^[8]
• The CD may be callable. The terms may state that the bank or credit union can close the CD before the term ends.
• Payment of interest. Interest may be paid out as it is accrued or it may accumulate in the CD.
• Interest calculation. The CD may start earning interest from the date of deposit or from the start of the next month or quarter.
• Right to delay withdrawals. Institutions generally have the right to delay withdrawals for a specified period to stop a bank run.
• Withdrawal of principal. May be at the discretion of the financial institution. Withdrawal of principal below a certain minimum—or any withdrawal of principal at all—may require closure of the entire CD. A US Individual Retirement Account CD may allow withdrawal of IRA Required Minimum Distributions without a withdrawal penalty.
• Withdrawal of interest. May be limited to the most recent interest payment or allow for withdrawal of accumulated total interest since the CD was opened. Interest may be calculated to date of withdrawal or through the end of the last month or last quarter.
• Penalty for early withdrawal. May be measured in months of interest, may be calculated to be equal to the institution's current cost of replacing the money, or may use another formula. May or may not reduce the principal—for example, if principal is withdrawn three months after opening a CD with a six-month penalty.
• Fees. A fee may be specified for withdrawal or closure or for providing a certified check.
• Automatic renewal. The institution may or may not commit to sending a notice before automatic rollover at CD maturity. The institution may specify a grace period before automatically rolling over the CD to a new CD at maturity. Some banks have been known to renew at rates lower than that of the original CD.^[9]

Criticism[edit]

Negotiable Certificate Of Deposit Rates

There may be some correlation between CD interest rates and inflation. For example, in one situation interest rates might be 15% and inflation 15%, and in another situation interest rates might be 2% and inflation may be 2%. Of course, these factors cancel out, so the real interest rate, which indicates the maintenance or otherwise of value, is the same in these two examples.

However the real rates of return offered by CDs, as with other fixed interest instruments, can vary a lot. For example, during a credit crunch banks are in dire need of funds, and CD interest rate increases may not track inflation.^[10]

The above does not include taxes.^[11] When taxes are considered, the higher-rate situation above is worse, with a lower (more negative) real return, although the before-tax real rates of return are identical. The after-inflation, after-tax return is what is important.

Author Ric Edelman writes: 'You don't make any money in bank accounts (in real economic terms), simply because you're not supposed to.'^[12] On the other hand, he says, bank accounts and CDs are fine for holding cash for a short amount of time.

Negotiable Certificate Of Deposit Adalah

Even to the extent that CD rates are correlated with inflation, this can only be the expected inflation at the time the CD is bought. The actual inflation will be lower or higher. Locking in the interest rate for a long term may be bad (if inflation goes up) or good (if inflation goes down). For example, in the 1970s, inflation increased higher than it had been, and this was not fully reflected in interest rates. This is particularly important for longer-term notes, where the interest rate is locked in for some time. This gave rise to amusing nicknames for CDs.^[Example?] A little later, the opposite happened, and inflation declined.

In general, and in common with other fixed interest investments, the economic value of a CD rises when market interest rates fall, and vice versa.

Some banks pay lower than average rates, while others pay higher rates.^[13] In the United States, depositors can take advantage of the best FDIC-insured rates without increasing their risk.^[14]

As with other types of investment, investors should be suspicious of a CD offering an unusually high rate of return. For example Allen Stanford used fraudulent CDs with high rates to lure people into his Ponzi scheme.

References[edit]

1. ^Feldler, Alex (2017-06-13). 'The Best Jumbo CD Accounts of 2020'. MyBankTracker. Retrieved 2020-02-07.
2. ^'Fort Knox FCU – Early Withdrawal Penalty'. DepositAccounts.
3. ^'Main Street Bank closes CDs early'. JCDI. 2010-12-30.
4. ^'Callable Step-Up Certificates of Deposit Wells Fargo Bank, N.A. Disclosure Statement'(PDF). 2015-10-01. Archived from the original(PDF) on 2017-12-01. Retrieved 2017-11-22.
5. ^'What Are Callable Certificates of Deposit (CDs)?'. Do It Right. Retrieved 2017-11-22.
6. ^'A word of caution regarding 'Step-Up Callable CDs''. Financial Strength Coach. Retrieved 2017-11-22.
7. ^'CDARS'.
8. ^'ING Direct Account Disclosures'. Archived from the original on 2012-02-09. Retrieved 31 Jan 2012. Change to/Waiver of Terms: We can add to, delete or make any other changes ('Changes') we want to these terms at any time. You and your account will be bound by the Changes as soon as we implement them. If the Change isn't in your favor, before it's implemented, we'll let you know about it as required by law. However, if applicable law requires us to make a Change, you may not receive any prior notice. We can cancel, change or add products, accounts or services whenever we want. Notice of any such changes, additions or terminations will be provided as required by law. We can waive any of our rights under these Terms whenever we want, but this doesn't mean that we'll waive the same rights in the future.
9. ^'Major Bank Certificate of Deposit Renewal Rate Rip-Off'. Archived from the original on 2008-07-03.
10. ^Goldwasser, Joan (September 10, 2008). 'Upside of the Credit Crunch'. The Washington Post. Retrieved April 28, 2010.
11. ^Ric Edelman, The Truth About Money, 3rd ed., p. 30
12. ^Ric Edelman, The Truth About Money, 3rd ed., p. 61
13. ^Compare a typical large-bank 1-year CD, e.g., 'Wells Fargo'. vs the highest 1-year CD available at a listing service, e.g., 'BankCD.com'.
14. ^'FDIC: Insuring Your Deposits'. Archived from the original on 2008-09-16.

External links[edit]

• 2008 US SEC Litigation Release '..a scheme to defraud investors, many of them elderly, of approximately $3,661,248 by selling the investors fraudulent certificates of deposit.'