Purpose of Issue-CDs, Financial Management

Purpose of Issue

CDs benefit both issuers and investors. From the issuers (banks) point of view, CDs are issued foreseeing the advantages over conventional deposits. The motives behind issuing CDs are control over cost of funds and assured availability of funds for specific period. The banks are constrained to define an interest rate structure for their customers across the board. It is operationally difficult to offer different rates of interest for different deposits, especially with a wide network as seen on the Indian scenario. Consequently, most of the depositors will be paid the same rate of interest. However, in case of Certificates of Deposit the interest is determined on a case-to-case basis. Since the volumes are large, the rates offered on CDs are more sensitive to call rates than the rates on term deposit. It is possible to discriminate between two customers and give different rates, which is not normally possible in case of term deposits. The conventional deposits though having a fixed maturity can be withdrawn prematurely; whereas, investors have to wait till the CDs mature or approach the secondary market to sell them. Issuance of CD helps banks to maintain the market share. From the investors' point of view, CDs form a better way of deploying their short-term surplus funds. CDs offer higher yields when compared to conventional deposits, while the secondary market offers liquidity. They can be assured of interest and principal payment normally.

 

Posted Date: 9/11/2012 4:14:57 AM | Location : United States







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