Certificate of Deposit
Also written CD · Certificate of Deposit (CD)
A negotiable, unsecured money market instrument issued by a bank against funds deposited with it, sold at a discount and repaid at face value within one year.
In plain language
When a company or a fund has spare cash for a few weeks or months, it can park it with a bank. A plain fixed deposit locks that money in. A Certificate of Deposit (CD) does the same job but produces a piece of paper that can be sold to someone else before maturity, because it is negotiable.
The workbook describes a CD as a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank, for a maturity of up to one year. "Unsecured" means no collateral stands behind it; the holder relies on the issuing bank.
Like T-bills, a CD is a discounted instrument. The investor pays less than the face value today and receives the full face value on maturity. The difference is the return.
How it works
The Series VII workbook (Chapter 1, section 1.3, Money Market) gives these features:
| Feature | Workbook figure |
|---|---|
| Issuer | A bank; All India Financial Institutions (AIFIs) can also issue, guided by RBI directions |
| Nature | Negotiable, unsecured, Usance Promissory Note |
| Pricing | Discounted, like T-bills |
| Denomination | Rs 5 lakh and multiples thereof |
| Maturity (banks) | 7 days to one year |
| Maturity (AIFIs) | Not less than 1 year and not exceeding 3 years |
Two other places in the workbook touch CDs. Under the Electronic Book Provider framework (section 1.4.3), an issuer may choose to use the EBP platform for private placement of CDs; it is optional, not compulsory. And in repo in corporate bonds (section 1.3 j), CPs and CDs are listed among the eligible securities.
The formula
Return on a CD held to maturity (Rs) = Face value − Price paid
The workbook states only that CDs are discounted instruments redeemed at face value; it does not prescribe a pricing formula, so no yield convention is given here.
A worked example
The prices below are illustrative; the denomination rule is the workbook's.
A mutual fund wants to place Rs 20 lakh for a few months with a bank.
- Rs 20 lakh is 4 × Rs 5 lakh, so it can take 4 CDs of Rs 5,00,000 face value each. (An amount like Rs 7,50,000 could not be one CD, because CDs come in multiples of Rs 5 lakh.)
- Suppose the bank prices each CD at Rs 4,85,000.
- Amount paid today: 4 × Rs 4,85,000 = Rs 19,40,000.
- Amount received at maturity: 4 × Rs 5,00,000 = Rs 20,00,000.
- Return: Rs 20,00,000 − Rs 19,40,000 = Rs 60,000.
If the fund needs cash before maturity, it can sell the CDs to another investor, because they are negotiable. It could also use them as collateral in a corporate bond repo.
Why NISM asks about it
CDs appear in Chapter 1 (section 1.3, Money Market) as one of the instruments listed with call, notice and term money, repo, T-bills, CMBs and commercial paper, and again in the corporate bond repo list (section 1.3) and the EBP section (1.4.3). Questions are short and factual: who issues a CD, whether it is secured, its minimum size, its maturity range and how an AIFI's CD differs from a bank's.
Common exam traps
- A CD is unsecured. It is a promissory note, not a collateralised loan.
- CD versus Commercial Paper. Both are discounted, both come in Rs 5 lakh multiples and both run 7 days to one year. The difference is the issuer: banks issue CDs; corporates (and eligible NBFCs, AIFIs and others) issue CPs.
- AIFI CDs run 1 to 3 years, not up to one year like bank CDs.
- Negotiable means transferable before maturity. A CD is not the same as a non-transferable bank fixed deposit.
- EBP is optional for CDs ("may choose"), unlike the mandatory EBP route for large private placements of debt securities.
Where this is taught
- Series IV · Chapter 1: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series II-A · Chapter 3: Characteristics of Debt Securitiesintroduced here
- Series VI · Chapter 11: Special Services - Debt Instruments & Government Securitiesintroduced here
- Series X-A · Chapter 9: Investing in Fixed Income Securitiesintroduced here
- Series VII · Chapter 1: Introduction to Securities Marketintroduced here
Related terms
- Call moneyUncollateralised overnight lending and borrowing of funds between scheduled commercial banks and primary dealers — the shortest segment of the Indian money market.
- Commercial PaperA short-term, unsecured, discounted money market instrument through which eligible companies raise funds for 7 days to one year, issued in Rs 5 lakh multiples.
- RepoA ready forward contract: borrowing money by selling securities with an agreement to buy them back later at a higher price that includes the interest.
- Treasury BillA short-term Government of India debt instrument issued at a discount in tenors of 91, 182 or 364 days; it pays no interest, and the gain on redemption is taxed as a short-term capital gain.
- Electronic Book ProviderThe stock exchange platform on which privately placed debt securities above SEBI's thresholds must be bid for electronically, with published issue details and system-computed cut-offs.
- Money Market InstrumentsDebt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.
- Bond Equivalent YieldThe annualised simple-interest return on a money market instrument, computed on price and a 365-day year, so instruments of different maturities can be compared on one basis.
- Issuing & Paying AgentThe agent through which a commercial paper issue is allotted: it receives investors' demat details from the issuer, issues the IPA certificate and provides the allotment file used to credit CPs to demat accounts.
- Debt securityA written agreement to repay a loan, usually with interest, within a set time. Bonds, debentures, CP, CDs, G-Secs and T-Bills are all debt securities, and any type can be admitted to the depository.
- Notice moneyUnsecured lending or borrowing between banks for a period beyond overnight and up to 14 days, dealt and reported on the RBI's NDS-CALL platform.
- Term moneyUnsecured lending or borrowing between banks for a period of 15 days to 1 year, dealt and reported on the RBI's NDS-CALL platform, the longest tenor of the interbank call market.