CERTIFICATES OF CERTIFICATES OF DEPOSITSDEPOSITS

Presentation for the subject:Fixed Income SecuritiesFixed Income Securities

By Group No. 6By Group No. 6 Name Roll No.Aveek Bose 08Rohan D’Costa 12Shiva Easakku 17Pramod Menon 35Laxman Pirwani 45Kamal Chhawchharia

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Introduced in 1989 in India. Fixed interest rates and fixed tenure instruments

issued by banks and financial institutions. Safe way to make investments for a short or medium

period of time A negotiable money market instrument issued in

Demat form or as a Usance Promissory Notes. Offers a term-based assured return to the owner.

An IntroductionAn Introduction

FeaturesFeatures Can be issued by Scheduled Commercial Banks (Except

RRBs and Co-operative Banks) and Selected Financial Institution (Permitted by RBI within the umbrella limit fixed by RBI).

Maturity: Min. 7 days to Max. 12 Months (for Banks) Min. 1 Year to Max. 3 Years (For Financial Institutions)

Issued in denominations of 1 Lacs and multiples of 1 lacs thereafter.

Can be issued to individuals (other than minors), corporations, companies, trusts, associations.

NRIs can also subscribe on non–repatriable basis.

FeaturesFeatures Loan against collateral of CD not permitted. Buy Back of CD by Banks/ FIs before maturity is not

permitted. Interest rates can be Fixed or Floating. Rated by approved rating agencies such as CARE, ICRA,

CRISIL, and FITCH). Issue of CDs is governed by various directives issued by RBI. CRR/ SLR applicable on the issue prices in case of banks. No lock-in period

FeaturesFeatures Physical CDs are freely transferable by endorsement

and delivery. Dematerialized CDs can be transferred as per the

procedure applicable to other demat securities. CDs may be issued at a discount on face value. Security Aspects. Issue of Duplicate CDs.

The Guidelines including all above features, instructions and directives are issued by Reserve Bank of India vide Master Circular No. FMD. No. 38/02.08.003/200-10 Dated. 1st July 2009

Other Guidelines by RBIOther Guidelines by RBI Freeing of CDs from interest rate regulations in 1992. Permitting selected financial institutions to issue CDs

for a maturity period of 1 to 3 years. Abolishing limits to CDs issuances as a certain

proportion of average fortnightly outstanding aggregate deposits. (October 1993)

Reducing minimum issuance size from 1crore in 1989 to Rs 1 lakh in June 2002.

Withdrawal of restriction on minimum period for transferability.

Issuance of CDs only in dematerialized form (June 2002).

Permitting banks to issue floating rate CDs. (Oct 2002) Lowering the minimum maturity period to 7days.(April

2005)

Buying of CDsBuying of CDs Return method is an important criteria before

buying CD. Returns can be based on Annual Percentage Yield

(APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded

interest calculation. However, in APR method, simple interest

calculation is done to generate the return.

Format Of CDsFormat Of CDs Banks/FIs should issue CDs only in the

dematerialized form. Investors have option to seek CDs in physical form

as per Depositories Act 1966. Issuances of CDs in physical form will attract

stamp duty. No grace period for repayment of CDs. If maturity date is a holiday, payment to be made

on the immediate preceding working day.

Reporting to RBIReporting to RBI

The amount of CDs issued should be reported to RBI on a fortnightly return basis.

To be submitted within 10 days from the end of the fortnight date.

Types of CDsTypes of CDsCertificates of Deposits

Conventional CDs

Callable CDs

Brokered CDs

Bump Up CDs

Liquid CDs

Step Up/ Step down CDs

Variable Rate CDs

Add on CDs

Zero Coupon CDs

Types of CDsTypes of CDsConventional CDs:

Fixed Maturity Date Fixed Interest Rates

Callable CDs: The bank reserves the right to "call" the investment

after the initial non-callable period. Callable CDs pay a premium interest rate.

Brokered CDs:

Brokerage firms can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain number of deposits to the institution.

Instead of owning the entire CD, each investor owns a piece.

account records reflects that the broker is merely acting as an agent (e.g., "XYZ Brokerage as Custodian for Customers").

Types of CDsTypes of CDsBump Up CDs:

Allows the account holder to have the option to increase the interest rate once during the term of the CD.

The rate change does not change the original maturity date of the CD.

Liquid CDs: A fixed rate certificate of deposit, which allows to

withdraw a portion of the original deposit during the term without paying a penalty.

There will be some limits on the amount that can be withdrawn and number of withdrawals.

Step Up/ Step down CDs: Have a fixed interest rate for a period of time,

usually one year and then the interest rate automatically rises up to a predetermined rate or is lowered to a predetermined rate.

Types of CDsTypes of CDsVariable Rate CDs:

Tied to the outcome of a market index. The interest earned at maturity is based on the

percentage gain (or loss) from the Initial Index to the final Index value.

Can be tied to a bond or stock index or a reference rate like the Treasury bills, Prime Rate or the Consumer Price Index.

Add on CDs: Fixed or variable rate CDs to which can make

additional deposits. Zero Coupon CDs:

Issued at a substantial discount from the face amount of the CD.

The maturity terms are much longer, 15 to 20 years.

Do not pay interest until the maturity date.

Functioning of CDsFunctioning of CDsChoosing A CD: Besides the conventional CD that provides a fixed rate

of interest (ROI), there is another type, called Callable CD.

‘Calling’ here refers to a privilege enjoyed by the issuer to cancel the CD after a certain period of time, i.e. the CD can be ‘called’.

Maturity of CDs Financial institutions have different facilities on offer

when a Certificate matures. Automatically transfer the total amount on maturity

from their CDs to the savings account in their name. Automatically re-investing the amount due on maturity

into a new CD. Customers are reminded in advance about an

impending CD that is about to mature.

Functioning of CDsFunctioning of CDsUnderstanding Interest Rates The common notion is that CDs offer a fixed rate of

interest. Most of the banks will offer only fixed ROI over a period

of time. Callable or Multi-step CDs may offer a bonus-centric

interest rate.

Interest Payment At the time of maturity, the owner of a CD receives two

things: the principal amount and the interest generated. Interest that is earned on a monthly or annual basis. Interest is accrued in the certificate account, along with

the principal. (ROI is calculated on a compounded basis)

Functioning of CDsFunctioning of CDsLadders:: Longer terms may result in a loss of opportunity to lock

in higher interest rates in a rising-rate economy. Mitigation strategy for this is the "CD ladder" strategy. The investor distributes the deposits over a period of

several years (at higher rate), but in a way that part of it matures annually.

Reaps the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.

The responsibility for maintaining the ladder falls on the depositor, not the financial institution.

Depositors are free to distribute a ladder strategy across more than one bank

Advantages of CDsAdvantages of CDs Offer a higher rate of interest than Treasury bills

and savings account . Return on investment is ensured despite the rate

fluctuations in the market. Insured by Federal Deposit Insurance Corporation The return on CDs is assured and helps in financial

planning. Very easy to buy a CD. CDs can be purchased and sold through a

brokerage firm.

Disadvantages of CDsDisadvantages of CDs Money is tied down for long durations of time. As the rate of interest is fixed, it is difficult to

change or to take advantage of the market situation when the market rates are favorable.

Though the return rate is higher on CDs than savings account, it is much lower than other money market instruments.

According to the federal regulations, FDIC will insure CDs up to the maximum amount of $100,000 in a single financial institution.

Conventional Conventional CDsCDs

Low Minimum Deposits:• $ 5,000 minimum deposit for U.S. resident consumers and corporate customers • $ 10,000 minimum deposit for non-US resident consumers and corporate customers

Auto Renewal: For maturities greater than one month, maturity notice is

mailed not less than 14 days and not more than 30 days prior to the maturity date.

Automatically renewal of certificate of deposit for a period equal to the existing term, at the rate offered for that term on the maturity date.

CDs which are automatically renewed carry a 10-calendar-day grace period, including the maturity date for notifying the cancellation of CD and withdraw without incurring a premature withdrawal penalty.

Choice of Interest payment: Choice between cumulative and non-cumulative interest

payments.

In case of cumulative interest payments, interest is compounded

at quarterly intervals and paid along with the principal at the time

of maturity.

In case of non-cumulative, interest is credited to transaction

account at quarterly intervals.

Interest and principal can be paid only to the account holders.

Early Withdrawals: Deposits or withdrawals are not permissible before the

maturity date. In any case, when premature withdrawals are

permitted, the following penalty will be imposed:

The penalty is calculated at the interest rate which the CD is earning. The penalty is applied no matter how long the funds have been on deposit and may result in a reduction of the principal. A penalty is not charged if the account holder dies or is declared legally incompetent.

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