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Certificates of deposit


These were introduced into the British banking world in 1968 though they were common in the U.S.A. many years prior to then. Sterling certificatcs of deposit were certificates issued by banks in the U.K., including British branches of foreign banks, stating that the sum shown thereon had been deposited in the bank. They were intended as a competitive instrument with which the merchant banks could attract funds away from the clearing banks by the offer of higher interest rates on up to five-year fixed deposits. However, in 1971 the clearing banks themselves began to issue certificates and the attraction then focused on the liquidity of the earlier bonds as, being bearer bonds, they could be realized at any time. They were issued only for large deposits, the minimum being £10,000 and the maximum £50,000, which may be subdivided into units of the lower figure in order to facilitate negotiation of part holdings. Because of the fixed interest rate and easy negotiability, these bonds are popular with many large investors as they offer a higher average yield than normal short bonds.

The market in dollar certificates of deposit is much greater than in sterling certificates. At one time, exchange control regulations and the legal U.K. requirement that bearer bonds be entrusted to an authorized depository made the effective demand for dollar certificates in the U.K. somewhat low though they could be purchased with euro-dollars and afforded a useful bridging investment for such investment dollars. Dollar certifieates are available in multiples of 1,000 dollars with a minimum of $25,000 for short- term certificates and $10,000 for medium certificates.


Reference: The Penguin Business Dictionary, 3rd edt.