A short term investment, the certificate (CD) is evidence of the deposit of funds at a commercial bank for a specified period of time and at a specified rate of interest. The most common denomination is $100,000, so its appeal is limited to large investors. Money market banks quote rates on CDs; these rates are changed periodically in keeping with changes in money market rates. Yields on CDs are greater than those on treasury bills and repose and about the same as those on banker’s acceptances and commercial paper. Original maturities of CDs generally range from 30-360 days. A good secondary market has developed for the CDs of the large money market banks; default risk is that of the bank rating. Like bankers acceptances, corporations buy domestic as well as CDs of large foreign banks. The latter is known as “YANKEE” CDs, and they typically carry a higher expected return.
7 Comments