project cd
TRANSCRIPT
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10011 0010 1010 1101 0001 0100 1011Size of CD market
TREND ANALYSIS OFCERTIFICATE OF
DEPOSITS
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CERTIFICATE OF DEPOSITS
Issued by Scheduled commercial banks (except RRBs) and all
Indian Financial Institutions
Banks have to maintain the appropriate reserve requirement
i.e. CRR and SLRMinimum amount should be Rs.1lakh and in the multiples of
Rs.1Lakh
CDs can be issued to individuals, corporations, companies
NRI subscribe to CDs on non repatriable basis
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Maturity period of CDs issued by Banks is minimum 7 days and
maximum 1 year in case if FIs minimum period is 1 year ans maximum
is 3 years
CDs issued at a discount on face values
Easily Transferable
Banks/ FIs cannot grant loans against CDs,and they cannot buyback
their own CDs before matuarity
CDs can be issued in demat form as well as certificates in physical
form
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PAYMENT OF CERTIFICATE
Physical certificate should be presented for payment by the last holder
Banks can make payment through crossed cheque
Holder of dematted CDs will approach their respective depository
participants
ISSUE OF DUPLICATE CERTIFICATE
A notice is required to be given in local newspaper
Lapse of a reasonable period (15 days) from the day of the notice and
execution of an indemnity bond
Duplicate certificate should be issued in physical form
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How CDs work ?
Buying a CD
CDs typically require a minimum deposit, and may offer higher rates
for larger deposits..
ACD consist simply of a book entry and an item shown in the
consumer's periodic bank statements; that is, there is usually no
"certificate" assuch.
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Interest Payout
At most institutions, the CD purchaser can arrange to
have the interest periodically mailed as a check ortransferred into a checking orsavings account.
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Closing a CDWithdrawals before maturity are usually subject to a
substantial penalty. For a five-yearCD, this is often the
loss ofsix months' interest.
These penalties ensure that it is generally not in a
holder's best interest to withdraw the money before
maturity
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Ladders
Whilelongerinvestmentterms yieldhigherinterestrates,longerterms
alsomay resultinalossofopportunity tolockinhigherinterestrates
inarising-rateeconomy.
Intheladderstrategies,theinvestordistributesthedepositsoveraperiodofseveral years withthegoalofhavingallone'smoney
depositedatthelongestterm (andthereforethehigherrate),butina
way thatpartofitmaturesannually.
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Terms and conditions Therearemany variationsinthetermsandconditionsforCDs
The CD may becallable. Thetermsmay statethatthebankorcreditunioncan
closethe CDbeforethetermends.
Paymentofinterest. Interestmaybepaidoutasitisaccruedoritmay
accumulateinthe CD.
Interestcalculation. The CD may startearninginterestfromthedateofdepositorfromthestartofthenextmonthorquarter.
Righttodelay withdrawals. Institutionsgenerally havetherighttodelay
withdrawalsforaspecifiedperiodtostopabankrun.
Penalty forearly withdrawal. May bemeasuredinmonthsofinterest,may be
calculatedtobeequaltotheinstitution'scurrentcostofreplacingthemoney,
ormay useanotherformula. May ormay notreducetheprincipalforexample,ifprincipalis withdrawnthreemonthsafteropeninga CD withasix-
monthpenalty.
Fees. A feemay bespecifiedforwithdrawalorclosureorforprovidinga
certifiedcheck
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TypesofCertificateofdeposits
1.The Traditional CD-
With a traditional CD, you deposit a fixed amount of money for a certain timeperiod and, in return, you receive a pre-set interest rate. At the end of the timeperiod, or term, you can either cash out the CD or roll it over for another term
2.The Bump-up CD-This allows you to take advantage of rising rates.
3. The Liquid CD-
The liquid CD offers consumers the opportunity to withdraw money fromthe CD without penalties. There may be minimum balance requirements onthe account. The interest rate will usually be higher than the rate on amoney market rate, but less than a traditional CD of the same term andminimum.
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4. The Zero-coupon CD-
The zero-coupon CD works the same way as a zero-coupon bond, there
are no interest payments. You buy the CD at a deep discount to the parvalue - the amount you receive when the CD matures.
5. Callable CDs-If a CD is issued on a callable basis, the bank has theauthority to "call" on it after the pre-set call-protection expires, butbefore the actual CD maturity date .
6. Brokerage CDs-Brokerage CDs are sold through a brokerage. Banksoften use brokers as sales representatives to locate investors who want topurchase CDs. Brokered CDs are more competitive and will often payhigher rates than CDs from your local bank. These CDs can be tradedlike bonds on the secondary market,
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0011 0010 1010 1101 0001 0100 1011Why does Banksissue CD? CDsareissuedby banksduringperiodof
tightliquidty .Banksresorttothissource
whendepositgrowthissluggishbutcredit
demandishigh
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Why doesinvestorgoforCD.
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Differencebetween Savingaccount
and CDs Unlikeasavingsaccount,certificateofdepositaccounts
aresecureinvestments,especially whencomparedtoothersavingsoptionslikemutualfunds,stocks,andotherprivate
equity investments.
Becauseofthis easy access- LIQUIDITY interestratesonsavingsarelowercomparedto CD.
Thedifferencebetweena CD andregularsavingsaccountisthatthemoney ina CD cannotbe withdrawnuntilafterthetermonthe CD isover.Ifdonepenalty willbecharged
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0011 0010 1010 1101 0001 0100 1011AdvantagesofCDs Liquidity
Low minimuminvestment
Flexibility ofReinvestment
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0011 0010 1010 1101 0001 0100 1011Disadvantages Early withdrawlpenalty
Taxesonincome
Longlockinperiod
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Analysisoftrend
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Sizeofthe CD marketYEAR TOTAL OUTSTANDING
(RS IN CRORE)
INTEREST RATE
IN PERCENT
JULY 1991 4846 9-17
1991-92 5682 15-16
1992-93 9803 12.5-16.5
1993-94 5571 7-12.2
1994-95 8017 10-15
1995-96 16316 12-22.3
1996-97 12134 7-14.3
1997-98 14296 7.2-26
1998-99 3717 8-12.5
1999-2000 1227 7.5-12
2000-01 771 6.5-122001-02 1576 5.0-11
2002-03 908 5-1.10
2003-04 4764 3.87-5.16
2004-05 12078 4.21-6.34
2005-06 43568 6.50-8.94
Sep 12 2006 66340 4.60-8.50
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0
10000
20000
30000
40000
50000
60000
70000
TOTAL OUTSTANDING (RS IN CRORE)
Jul-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-032003-04
2004-05
2005-06
Sep 12 2006
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Thesizeofmoney mobilizedby bankstill
1997-98 throughcertificatesofdeposit
increasedindicatingthattheprimary market
fortheissuanceofthedepositsgrew
rapidly. Stringentcondition inthemoney
marketandfirmcallmoney ratesrekindledtheinterestofbanksin CDsin 1994-95 to
1997-98.
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Since 1998-99,thebanksrelianceonthe
relatively high-cost CDsdeclineddueto
downwardtrend intheratesofothermoneymarketinstrumentsandstronggrowthinbank
depositscoupled withadecelerationinnonfood
bankcredit. Moreover,interestratederegulationin
termdepositsandreductioninmaturity periodto15 days facilitatedbettermanagementofliabilities
bybanksandreducedtheirneedtoissue CDs.
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However,there wasasurgein Cdsissuesin2003-04 onaccountofreductioninthe
stampduty on Cds, withdrawlofthefacilityofprematureclosureofdepositsinrespectofCDsandexemptionofinvestmentin Cds
by banksfromtheinstructionsonnon-SLR
investmentbelow one year. Thesedevelopmentsledtogreaterdemandforinvestmentin CDsby mutualfunds
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Since2004-05 ,thedemandforinvestmentin CDswasfurtherpushedby privatesectorbanksastheyarecostattractivevis-a-vis fixed
deposit.moreover,ascomparedtofixeddeposits,CDsdonotcarryprepayment orprematureclosureandtaxdeductedatsourse(TDS) .also,thereductionintheminimummaturityperiodfrom 15 daysto 7 days made CDsanattractiveinvestmentavenueforbothprivatesectorbanksandmutualfunds. TheoutstandingCDsconstitutrd 4% oftheaggregatedeposits ofissuingbanksasatend march 2006
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0011 0010 1010 1101 0001 0100 1011conclusion CDsofcommercialbanksformonly 2% oftheir
aggregatedeposits.Hencethereislargescopeof
thedevelopmentofthisinstrument. Followingfactorshoweverlimitthegrowthof
CDs
insecondary marketlimitedparticipant,high
interestrate,unlistingofCDs.becauseofhigherinterestrateon CDspeopleprefer
toholdittillmaturity.
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Nofacility ofloansagainstthedeposits by
banksnorbankcanbuy themback.
Minimumlevelofinvestmentisstillhigh
Stampduty.
Fixedrateofdiscountshouldbereplacedby
floatingrate.
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