The credit quality of the issuing bank is the primary consideration in the sterling market the lowest yield is paid by “clearer” CDs, which are CDs issued by the clearing banks such as RBS NatWest, HSBC and Barclays plc. As CDs are issued by banks as part of their short-term funding and liquidity requirement, issue volumes are driven by the demand for bank loans and the availability of alternative sources of funds for bank customers. The coupon quoted on a CD is a function of the credit quality of the issuing bank, its expected liquidity level in the market, and of course the maturity of the CD, as this will be considered relative to the money market yield curve. Unlike coupons on bonds, which are paid in rounded amounts, CD coupon is calculated to the exact day.ĬD yields. 4 The largest group of CD investors are banks themselves, money market funds, corporates and local authority treasurers. In the United States CDs are available in smaller denomination amounts to retail investors. The interest rate is sometimes called the coupon, but unless the CD is held to maturity this will not equal the yield, which is of course, the current rate available in the market and varies over time. The interest is paid, together with the face amount, on maturity. On issue a CD is sold for face value, so the settlement proceeds of a CD on issue always equal its nominal value. A CD will have a stated interest rate and fixed maturity date and can be issued in any denomination. Interest is paid on maturity except for CDs lasting longer than one year, where interest is paid annually or, occasionally, semi-annually.īanks, merchant banks and building societies issue CDs to raise funds to finance their business activities. Most CDs issued are of between one and three months maturity, although they do trade in maturities of one to five years. 3 CDs are therefore very similar to negotiable money market deposits, although the yields are about 0.15% below the equivalent deposit rates because of the added benefit of liquidity.
However, the certificates themselves can be traded in a secondary market, that is, they are negotiable. The deposits themselves carry a fixed rate of interest related to LIBOR and have a fixed term to maturity, so cannot be withdrawn before maturity. They were first introduced in the sterling market in 1958.
Moorad Choudhry, in The Repo Handbook (Second Edition), 2010 4.2.2 Certificates of DepositĬertificates of Deposit (CDs) are receipts from banks for deposits that have been placed with them.
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