Certificates of Deposit Explained

Another potentially confusing financial term that you might come across is what is known as a Certificate of Deposit. So just what exactly is this?

Well, this is effectively a securitised bank deposit. What is the purpose of this and why did it come about?

Well, in an ideal world a bank would wish to take deposits from customers understanding that they wouyld not be repayable in the short term - this helps the banks know exactly what their cash position is.

However, of course, investors in most products won't commit for a specific time, or if they do that they will want a naturally much higher rate of interest or premium.

The way around this is the certificate of deposit, and was created in the 1960s, and it has a fixed rate with a maturity of up to fice years.

As such it is a security and just like securities it can be traded on the markets, this means in practice that whoever holds the certificate of deposit can actually realise the deposit through the sale of the certificate and not directly through the withdrawal of the money!

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