Investing in Certificates of Deposit | Pros and Cons

Certificates of Deposit
Certificates of Deposit

The certificates of deposit are a financial product that is enjoying great success. It is restricted and transferable by which the customer deposits a certain sum of money at a bank and this is bound to return at maturity. The owner has the right to repayment of principal and payment of interest also through periodic coupons or to maturity. There are also certificates of deposit subscribed at a discount and redeemed at face value. The duration of the certificates of deposit can range from 3 to 60 months (5 years) and they can be fixed or variable. The first makes a fixed and predetermined interest rate. For those variable interest rate changes to certain deadlines and according to market rates.

Certificate of Deposit

Certificate of Deposit

What are the risks of investing in certificates of deposit?

* Liquidity Risk: Certificates with a maturity of less than 18 months can not be redeemed prior to this deadline. If you have a maturity of over 18 months, you can claim a refund when at least 18 months have elapsed from the issue.
* Interest rate risk: for variable rate CD, even if they oscillate the market rates, the current coupon remains the same.
* Risk of destruction, loss or theft if the certificate is material and in the hands of the holder.
* High withholding tax of 20%. With the latest tax directives, CDs are subject to the rules on stamp duty which are 0.15% with a minimum of € 34,20 without caps.

Certificates of Deposit

Certificates of Deposit

What are the advantages of certificates of deposit?

* They are covered by the Interbank Deposit Protection Fund up to a sum of € 100.00 for each depositor at each bank.
* Returns are rather high provided, however, that you keep the money idle for a certain period of time.

As a form of investment CDs are definitely cheaper for banks which in this way collects money savers and invests them in riskier products that pay more.

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