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Certificate of deposit
From Wikipedia, the free encyclopedia
This article is specific to the United States. For a more general article, see Time deposit.

                  Banking in the United States

                         Monetary policy
                   The Federal Reserve System


                            Credit card

                         Deposit accounts
                         Savings account

                         Checking account

                      Money market account

                       Certificate of deposit

                    Deposit account insurance
                         FDIC and NCUA

                  Electronic funds transfer (EFT)

                            ATM card

                            Debit card

                           Bill payment

                             Wire transfer

                       Check Clearing System

                   Substitute checks • Check 21 Act

                        Types of bank charter
                             Credit union

                         Federal savings bank

                      Federal savings association

                            National bank


A certificate of Deposit, USA, 1932

A certificate of Deposit or CD is a time deposit, a financial product commonly offered to consumers
by banks, thrift institutions, and credit unions.

CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the
bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different
from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five
years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the
money may be withdrawn together with the accruedinterest.

In exchange for keeping the money on deposit for the agreed-on term, institutions usually grant higher interest
rates than they do on accounts from which money may be withdrawn on demand, although this may not be the
case in an inverted yield curve situation. Fixed rates are common, but some institutions offer CDs with various
forms of variable rates. For example, in mid-2004, interest rates were expected to rise, many banks and credit
unions began to offer CDs with a "bump-up" feature. These allow for a single readjustment of the interest rate,
at a time of the consumer's choosing, during the term of the CD. Sometimes, CDs that are indexed to the stock
market, the bond market, or other indices are introduced.
    A few general guidelines for interest rates are:

                                     A larger principal should receive a higher interest rate, but may not.

                                     A longer term will usually receive a higher interest rate, except in the case of
                                      an inverted yield curve (i.e. preceding a recession)

                                     Smaller institutions tend to offer higher interest rates than larger ones.

                                     Personal CD accounts generally receive higher interest rates than business
                                      CD accounts.

                                     Banks and credit unions that are not insured by the FDIC or NCUA generally
                                      offer higher interest rates.

    Certificate Of Deposit - CD

    What Does Certificate Of Deposit - CD Mean?
    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified
    fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks
    and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

    Investopedia explains Certificate Of Deposit - CD
    A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders
    from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will
    often incur a penalty.

    For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded
    annually and a term of one year. At year's end, the CD will have grown to $10,500 ($10,000 * 1.05).

    CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or
    "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.


   1 How CDs work

     o   1.1 Interest payout

     o   1.2 Closing a CD
     o    1.3 CD refinance

     o    1.4 Ladders

   2 Deposit insurance

   3 Terms and conditions

   4 Other similar products

     o    4.1 Callable CDs

     o    4.2 Brokered CDs

     o    4.3 Bump-up CDs

     o    4.4 Liquid CDs

     o    4.5 Step-up CD or step-down CDs

     o    4.6 Variable-rate CDs

     o    4.7 Add-on CDs

     o    4.8 Zero-coupon CD

   5 Criticism

   6 References

   7 External links

    [edit]How      CDs work

    CDs typically require a minimum deposit, and may offer higher rates for larger deposits. In the US, the best
    rates are generally offered on "Jumbo CDs" with minimum deposits of $100,000. However there are also
    institutions that do the opposite and offer lower rates for their "Jumbo CDs". The consumer who opens a CD
    may receive a passbook or paper certificate. It is now common for a CD to consist simply of a book entry and
    an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such.

    [edit]Interest        payout
    At most institutions, the CD purchaser can arrange to have the interest periodically mailed as a check or
    transferred into a checking or savings account. This reduces total yield because there is no compounding.
    Some institutions allow the customer to select this option only at the time the CD is opened.

    [edit]Closing         a CD
    Withdrawals before maturity are usually subject to a substantial penalty. For a five-year CD, this is often the
    loss of six months' interest. These penalties ensure that it is generally not in a holder's best interest to withdraw
    the money before maturity—unless the holder has another investment with significantly higher return or has a
    serious need for the money.
Commonly, institutions mail a notice to the CD holder shortly before the CD matures requesting directions. The
notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over"
(depositing it into a new CD). Generally, a "window" is allowed after maturity where the CD holder can cash in
the CD without penalty. In the absence of such directions, it is common for the institution to roll over the CD
automatically, once again tying up the money for a period of time (though the CD holder may be able to specify
at the time the CD is opened not to roll over the CD).

[edit]CD   refinance
In the U.S. insured CDs are required by the Truth in Savings Regulation DD to state at the time of account
opening the penalty for early withdrawal. These penalties cannot be revised by the depository prior to
maturity.[citation needed] The penalty for early withdrawal is the deterrent to allowing depositors to take advantage of
subsequent enhanced investment opportunities during the term of the CD. In rising interest rate environments
the penalty may be insufficient to discourage depositors from redeeming their deposit and reinvesting the
proceeds after paying the applicable early withdrawal penalty. The added interest from the new higher yielding
CD may more than offset the cost of the early withdrawal penalty.


While longer investment terms yield higher interest rates, longer terms also may result in a loss of opportunity
to lock in higher interest rates in a rising-rate economy. A common mitigation strategy for this opportunity
cost is the "CD ladder" strategy. In the ladder strategies, the investor distributes the deposits over a period of
several years with the goal of having all one's money deposited at the longest term (and therefore the higher
rate), but in a way that part of it matures annually. In this way, the depositor reaps the benefits of the longest-
term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.

For example, an investor beginning a three-year ladder strategy would start by depositing equal amounts of
money each into a 3-year CD, 2-year CD, and 1-year CD. From this point on, a CD will reach maturity every
year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor
would have all money deposited at a three-year rate, yet have one-third of the deposits mature every year
(which can then be reinvested, augmented, or withdrawn).

The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the
ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across
more than one bank, which can be advantageous as smaller banks may not offer the longer terms found at
some larger banks. Although laddering is most common with CDs, this strategy may be employed on any time
deposit account with similar terms.

[edit]Deposit      insurance
In the US, the amount of insurance coverage varies depending on how accounts for an individual or family are
structured at the institution. The level of insurance is governed by complex FDIC and NCUA rules, available
in FDIC and NCUA booklets or online. The standard insurance coverage is currently $250,000 per owner or
depositor for single accounts or $250,000 per co-owner for joint accounts.

Some institutions use a private insurance company instead of, or in addition to, the Federally backed FDIC or
NCUA deposit insurance. Institutions often stop using private supplemental insurance when they find that few
customers have a high enough balance level to justify the additional cost.

The Certificate of Deposit Account Registry Service program allows investors to keep up to $50 million invested
in CDs managed through one bank with full FDIC insurance.[1] However rates will likely not be the highest

[edit]Terms     and conditions

There are many variations in the terms and conditions for CDs.

In the US, the federally required "Truth in Savings" booklet, or other disclosure document that gives the terms
of the CD, must be made available before the purchase. Employees of the institution are generally not familiar
with this information; only the written document carries legal weight. If the original issuing institution has
merged with another institution, or if the CD is closed early by the purchaser, or there is some other issue, the
purchaser will need to refer to the terms and conditions document to ensure that the withdrawal is processed
following the original terms of the contract.

                                  The CD may be callable. The terms may state that the bank or credit union
                                   can close the CD before the term ends.

                                  Payment of interest. Interest may be paid out as it is accrued or it may
                                   accumulate in the CD.

                                  Interest calculation. The CD may start earning interest from the date of
                                   deposit or from the start of the next month or quarter.

                                  Right to delay withdrawals. Institutions generally have the right to delay
                                   withdrawals for a specified period to stop a bank run.

                                  Withdrawal of principal. May be at the discretion of the financial institution.
                                   Withdrawal of principal below a certain minimum—or any withdrawal of
                                   principal at all—may require closure of the entire CD. A US Individual
                                   Retirement Account CD may allow withdrawal of IRA Required Minimum
                                   Distributions without a withdrawal penalty.

                                  Withdrawal of interest. May be limited to the most recent interest payment or
                                   allow for withdrawal of accumulated total interest since the CD was opened.
                                    Interest may be calculated to date of withdrawal or through the end of the last
                                    month or last quarter.

                                   Penalty for early withdrawal. May be measured in months of interest, may
                                    be calculated to be equal to the institution's current cost of replacing the
                                    money, or may use another formula. May or may not reduce the principal—for
                                    example, if principal is withdrawn three months after opening a CD with a six-
                                    month penalty.

                                   Fees. A fee may be specified for withdrawal or closure or for providing
                                    a certified check.

                                   Automatic renewal. The institution may or may not commit to sending a
                                    notice before automatic rollover at CD maturity. The institution may specify a
                                    grace period before automatically rolling over the CD to a new CD at maturity.
                                    Be careful as some otherwise respectable banks have been known to renew
                                    at scandalously low rates.[2]
[edit]Other    similar products
                           This section does not cite any references or sources.
                           Please help improve this article by adding citations to reliable sources. Unsourced material may
                           be challenged andremoved. (March 2009)

This article has described the familiar FDIC-insured or NCUA-insured CDs which are usually purchased by
consumers directly from banks or credit unions. There are also "certificates of deposit" issued by various
entities that do not carry insurance.

[edit]Callable    CDs
A callable CD is similar to a traditional CD, except that the bank reserves the right to "call" the investment. After
the initial non-callable period, the bank can buy (call) back the CD. Callable CDs pay a premium interest rate.
Banks manage their interest rate risk by selling callable CDs. On the call date, the banks determine if it is
cheaper to replace the investment or leave it outstanding. This is similar to refinancing a mortgage.

[edit]Brokered      CDs
Many brokerage firms – known as "deposit brokers" – offer CDs. These brokerage firms can sometimes
negotiate a higher rate of interest for a CD by promising to bring a certain number of deposits to the institution.

Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors. Instead of
owning the entire CD, each investor owns a piece. If several investors own the CD, the deposit broker may not
list each person's name in the title but the account records should reflect that the broker is merely acting as an
agent (e.g., "XYZ Brokerage as Custodian for Customers"). This ensures that each portion of the CD qualifies
for up to $100,000 of FDIC coverage.
In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty for early
withdrawal. In those cases, the deposit broker will instead try to resell the CD if the investor wants to redeem it
before maturity. If interest rates have fallen since the CD was purchased, and demand is high, he/she may be
able to sell the CD for a profit. But if interest rates have risen, there may be less demand for such lower-
yielding CD, which means that he/she may have to sell the CD at a discount and lose some of the investor’s
original deposit.

Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal
agency licenses, examines, or approves them.

In the event of bank failure, FDIC insurance applies but may be more difficult to realize. Direct deposit CDs are
often allowed to mature at the original rate by the acquiring bank, but brokered accounts usually stop paying
interest immediately. Brokered depositors may not be timely notified. Further, the FDIC will pay claims on direct
deposits within 7–10 days, brokered CD claims may take 30–60 days. Additionally, the FDIC may require that
brokered depositors prove they do not hold simultaneous direct and brokered deposits which exceed FDIC

[edit]Bump-up        CDs
A Bump Up CD allows the account holder the option to increase the interest rate once during the term of the
CD. Upon request, the bank will “bump up” the interest rate on the certificate of deposit to a higher rate being
offered by the issuing bank on that CD (or a comparable term CD). The rate change does not change the
original maturity date of the CD.

[edit]Liquid    CDs
This type of CD is generally a fixed rate certificate of deposit, which allows you to withdraw a portion of the
original deposit during the term without paying a penalty. There will be some limits on when you can take the
money out, the amount that can be withdrawn and how many separate withdrawals you can make from the CD.

[edit]Step-up       CD or step-down CDs
These can also be called a flex CD and can be confused with a Bump Up CD. Certificates of deposit with a
step up or down feature have a fixed interest rate for a period of time, usually one year and then the interest
rate automatically rises up to a predetermined rate or is lowered to a predetermined rate.

[edit]Variable-rate        CDs
Unlike traditional CD's that pay a fixed rate of interest, a variable rate CD or index based CD is tied to the
outcome of a market index. The interest you earn at maturity is based on the percentage gain (or loss) from the
Initial Index to the final Index value.
These certificates of deposit can be tied to a bond or stock index or a reference rate like the Treasury bills,
Prime Rate or the Consumer Price Index.

[edit]Add-on      CDs
These are fixed or variable rate CDs to which you can make additional deposits. There can be restrictions,
such as a minimum deposit that can be made to the account.,

[edit]Zero-coupon          CD
These certificates of deposit are issued at a substantial discount from the face amount of the CD. Typically the
maturity terms are much longer, 15 to 20 years, which results in the discounted price. Zero coupon CDs do not
pay interest until the maturity date.


CD interest rates closely track inflation.[3] For example, in one situation interest rates may be 15% and inflation
may be 15%, and in another situation interest rates may be 2% and inflation may be 2%. Of course, these
factors cancel out, so the real interest rate is the same in both cases.

In this situation, it is a misinterpretation that the interest is an increase in value. However, to keep the same
value the rate of withdrawal must be the same as the real rate of return, in this case, zero. People may also
think that the higher-rate situation is "better," when the real rate of return is actually the same.

Also, the above does not include taxes.[4] When taxes are considered, the higher-rate situation above is worse,
with a lower (more negative) real return, although the before-tax real rates of return are identical. The after-
inflation, after-tax return is what's important.

Ric Edelman writes, "You don't make any money in bank accounts (in real economic terms), simply because
you're not supposed to.";[5] on the other hand, bank accounts and CDs are fine for holding cash for a short
amount of time.

However Mr. Edelman's opinions may apply only to "average" CD interest rates. In reality, some banks pay
much lower than average rates while others pay much higher rates (differences of 100% are not unusual, eg,
2.50% vs 5.00%).[6] In the United States, depositors can take advantage of the best FDIC-insured rates without
increasing their risk.[7] Furthermore, a long-term CD might have a high nominal interest rate with a relatively
low real interest rate due to high inflation at the time of purchase (as indicated above); however inflation rates
often change rapidly and the final real interest rate could be significantly higher than riskier investments.[8]

Finally, Mr. Edelman's statement that "CD interest rates closely track inflation" is not necessarily true. For
example, during a credit crunchbanks are in dire need of funds and CD interest rate increases may not track
                               A Thank You from
                         Wikipedia Founder Jimmy Wales
                                        Read now

Commercial paper
From Wikipedia, the free encyclopedia
    Financial markets

        Public market



        Bond market

        Fixed income

       Corporate bond

      Government bond

       Municipal bond

       Bond valuation

       High-yield debt

        Stock market


       Preferred stock

       Common stock
  Registered share

    Voting share

  Stock exchange

Derivatives market


  Hybrid security

  Credit derivative

 Futures exchange

OTC, non organized

    Spot market




 Foreign exchange

   Exchange rate


  Other markets

   Money market

Reinsurance market

Commodity market

 Real estate market

 Practical trading


  Clearing house

Financial regulation

  Finance series

 Banks and banking

 Corporate finance

  Personal finance
            Public finance


                             The examples and perspective in this article may not represent aworldwide
                             view of the subject. Please improve this article and discuss the issue on
                             the talk page. (December 2010)

    Commercial Paper

    What Does Commercial Paper Mean?
    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts
    receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any
    longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

    Investopedia explains Commercial Paper
    Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt
    ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt

    A major benefit of commercial paper is that it does not need to be registered with the Securities and
    Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-
    effective means of financing. The proceeds from this type of financing can only be used on current assets
    (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC

    In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to
    270 days. Commercial Paper is a money-market security issued (sold) by large banks and corporations to
    get moneyto meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or
    corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed
    by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their
    commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and
    carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher
    the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically
    lower than banks' rates.[1]


   1 Overview
   2 History

   3 Issuance

   4 Line of credit

   5 Commercial Paper Yields

   6 Defaults

   7 See also

   8 References

   9 External links


    U.S. Commercial Paper types outstanding at end of each year 2001 to 2007

    Total U.S. CP outstanding each week. Note the Federal reserve changes its methods of calculation

    As defined by American law, commercial paper is a financial instrumentthat matures before nine months (270
    days), and is only used to fundoperating expenses or current assets (e.g., inventories and receivables) and not
    used for financing fixed assets, such as land, buildings, ormachinery.[2] By meeting these qualifications it may
    be issued withoutU.S. federal government regulation, that is, it need not be registeredwith the U.S. Securities
    and Exchange Commission.[3] Commercial paper is a type of negotiable instrument, where
the legal rights andobligations of involved parties are governed by Articles Three and Four of the Uniform
Commercial Code, a set of non-federal business lawsadopted by all 50 U.S. States except Louisiana.[4]

At the end of 2009, more than 1,700 companies in the United Statesissue commercial paper. As of 2008
October 31, the U.S. Federal Reserve reported seasonally adjusted figures for the end of 2007: there was
$1.7807 trillion (short-scale, or 1,780,700,000,000) in total outstanding commercial paper; $801.3 billion
was "asset backed" and $979.4 billion was not; $162.7 billion of the latter was issued by non-financial
corporations, and $816.7 billion was issued by financial corporations.[5]


Commercial paper, in the form of promissory notes issued by corporations, have existed since at least the 19th
century. For instance, Marcus Goldman, founder of Goldman Sachs, got his start trading commercial paper in
New York in 1869. [6]


There are two methods of issuing paper. The issuer can market the securities directly to a buy and
hold investor such as most money market funds. Alternatively, it can sell the paper to a dealer, who then sells
the paper in the market. The dealer market for commercial paper involves large securities firms and
subsidiaries of bank holding companies. Most of these firms also are dealers in US Treasury securities. Direct
issuers of commercial paper usually are financial companies that have frequent and sizable borrowing needs
and find it more economical to sell paper without the use of an intermediary. In the United States, direct issuers
save a dealer fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every
$100 million outstanding. This saving compensates for the cost of maintaining a permanent sales staff to
market the paper. Dealer fees tend to be lower outside the United States.

[edit]Line   of credit

Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes
established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank
line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often
charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem
like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan
resulting in a loss for the banks.
Advantage of commercial paper:

                                    High credit ratings fetch a lower cost of capital.

                                    Wide range of maturity provide more flexibility.

                                    It does not create any lien on asset of the company.
                                     Tradability of Commercial Paper provides investors with exit options.

Disadvantages of commercial paper:

                                     Its usage is limited to only blue chip companies.

                                     Issuances of Commercial Paper bring down the bank credit limits.

                                     A high degree of control is exercised on issue of Commercial Paper.

                                     Stand-by credit may become necessary
[edit]Commercial           Paper Yields

Like Treasury Bills, yields on commercial paper are quoted on a discount basis—the discount return to
commercial paper holders is the annualized percentage difference between the price paid for the paper and the
par value using a 360-day year. Specifically: icp(dy) = [(Pf - P0)/Pf] x (360/h)

and when converted to a bond equivalent yield:

icp(bey) = [(Pf - P0)/P0] x (365/h)


Defaults on high quality commercial paper are rare, and cause concern when they occur.[7] Notable examples

                                     On June 21, 1970, Penn Central defaulted on a debt of $77.1 million

                                          The Federal Reserve intervened and cut Penn Central's bond rating from
                                          BBB to Bb.[8] This placed a substantial burden on clients of the issuing
                                          dealer for Penn Central’s commercial paper, Goldman Sachs.

                                     On January 31, 1997, Mercury Finance, a major automotive lender, defaulted
                                      on a debt of $17 million, rising to $315 million.

                                          Effects were small, partly because default occurred during a robust

                                     On September 15, 2008, Lehman Brothers caused two money funds to break
                                      the buck, and led to Fed intervention in money market funds.
[edit]See    also

                                     Asset-backed commercial paper

                                     Negotiable instrument
                                 1.   ^ "What is commercial paper, and why does it matter?". Retrieved 2008-10-


                                 2.   ^ Hahn, Thomas K.; Timothy Q. Cook and Robert K. Laroche

                                      (1993). "Commercial Paper," Ch. 9, in Instruments of the Money Market.

                                      Richmond, VA: Federal Reserve Bank of Richmond. pp. 106–07.

                                 3.   ^ 15 U.S.C. Section 77c(a)(3)

                                 4.   ^ Ontario Securities Commission National Instrument 45-106 (Section 2.35)

                                      Accessed 2007-01-30

                                 5.   ^ Federal Reserve. "FRB: Commercial Paper Outstanding". Retrieved 2008-

                                      10-31. "Data as of October 29, 2008"

                                 6.   ^ Uhtermyer Urges Money Bill Changes; Approves Measure, but Wants

                                      Commercial Paper Defined in Its Strict Meaning in The New York Times of

                                      September 23, 1913 Commercial Paper Should Be Changed; Gardin Thinks

                                      Three Years Sufficient for Transition to European Practice in The New York
                                      Times of March 1, 1914
                                           a b
                                 7.   ^          Stojanovic, Dusan; Vaughan, Mark D.. "The Commercial Paper Market:

                                      Who's Minding the Shop?". Retrieved 2008-09-23.

                                 8.   ^ Ellis, Charles D. The Partnership: The Making of Goldman Sachs. Rev. ed.

                                      London: Penguin, 2009. 98. Print.

[edit]External   links

            Look up commercial
            paper inWiktionary, the free

                                Federal Reserve System release on commercial papers

                                Commercial paper - Encyclopedic entry

                                An article from The Times on commercial paper and credit market vernacular

                                CP Daily - Premium provider of research and searchable databases relating to
                                 global CP and ECP markets.

                                Stepek, John. What's wrong with commercial paper? MoneyWeek, August 31,
                                 2007 - How the subprime crisis has affected the commercial paper market

                                What is Commercial Paper? - Mortgage News Daily
                                                       Fed Bank of Richmond, VA - History of origin, and special regulations
                                                        governing issue of commercial paper. Thomas K Hahn, Federal Reserve Bank
                                                        of Richmond

                                                       The Week America's Economy Almost Died National Public Radio broadcast
                                                        September 26, 2008.
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Gilt-edged securities
From Wikipedia, the free encyclopedia
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                        Please help to improve this article by introducing more precise citations where appropriate. (February 2010)
    Gilts are bonds issued by the governments of the United Kingdom, South Africa, or Ireland. The term is of
    British origin, and refers to the debtsecurities issued by the Bank of England, which had a gilt (or gilded) edge.
    Hence, they are called gilt-edged securities, or gilts for short. Generally, when a market participant refers to
    gilts, what is meant is British gilts unless otherwise specified, and the description below applies to the UK gilt
    market. ONS data reveal that about two-thirds of all gilts are held by insurance companies and pension
    funds.[1] During 2009 large quantities of gilts were purchased by the Bank of England under its policy
    of quantitative easing.

    The term "Gilt Account" is also a term used by the Reserve Bank of India to refer to constituent account
    maintained by a custodian bank for maintenance and servicing of dematerialized Government Securities owned
    by a retail customer.[2]


   1 Conventional gilts

     o     1.1 Coupon rate

     o     1.2 Gilt names

     o     1.3 Trends

   2 Index-linked gilts

     o     2.1 Indexation lag

   3 Double-dated gilts

   4 Undated gilts

   5 Gilt strips

   6 Maturity of gilts

   7 See also

   8 References

    [edit]Conventional             gilts

    These are the simplest form of UK government bond and make up the largest share of UK government
    debt.[3] A conventional gilt is a bond issued by the UK government which pays the holder a fixed cash payment
    (or coupon) every six months until maturity, at which point the holder receives their final coupon payment and
    the return of the principal.

    [edit]Coupon           rate
Conventional gilts are denoted by their coupon rate and maturity year, e.g. 4¼% Treasury Gilt 2055. The
coupon paid on the gilt typically reflects the market rate of interest at the time of issue of the gilt, and indicates
the cash payment per £100 that the holder will receive each year in two semi-annual payments.

[edit]Gilt   names
Historically, gilt names referred to their purpose of issuance, or signified how a stock had been created, such
as 10¼% Conversion Stock 1999. In more recent times, gilts have been generally named Treasury Stocks.
From 2005-2006 onwards, all new issues of gilts are being called Treasury Gilts.


The most noticeable trends in the gilt market in recent years have been:

                                  a decline in market yields as the currency has stabilised compared to the

                                  a decline in coupons: several gilts were issued in the 1970s with coupons of
                                   around 15% per annum, but these have now matured

                                  a decline in the number of different gilts in issue, as the policy of the
                                   government has been to issue large quantities of each gilt (around £10 billion-
                                   30 billion) to maximise liquidity in global markets

                                  an increase in the volume of issuance as the Public Sector Borrowing
                                   Requirement has increased

                                  a large volume of gilts have been repurchased by central government under
                                   its quantitative easing programme
[edit]Index-linked        gilts

See also: Inflation-indexed bond

These account for around a quarter of UK government debt. The UK was one of the first developed economies
to issue index-linked bonds in 1981, and has issued 19 index-linked bonds since that date. Like conventional
gilts, index-linked gilts pay coupons which are initially set in line with market interest rates. However, their semi-
annual coupons and principal payment are adjusted in line with movements in the General Index of Retail
Prices (RPI).

In September 2005, the UK Government issued the longest ever index-linked government bond, 1¼% Index-
linked Treasury Gilt 2055, maturing on 22 November 2055.

[edit]Indexation       lag
As with all index-linked bonds, there is a time lag between the publication of the inflation index and the
indexation of the bond. From their introduction in 1981, index-linked gilts had an eight-month indexation lag -
this was so that the amount of the next coupon was known at the start of the interest accrual period. However
in 2005 the UK Debt Management Office announced that all new issues of index-linked gilts would use a three-
month indexation lag design, first used in the Canadian Real Return Bond market, and several gilts have now
been issued on that basis.

[edit]Double-dated           gilts

In the past, the UK government issued many double-dated gilts, which had a range of maturity dates, such as
12% Exchequer Stock 2013-2017. There are now only two of these gilts remaining in issue, both "rump gilts"
with a relatively small amount outstanding and a very limited market, and these are likely to be redeemed in the
next few years.

[edit]Undated       gilts

There exist eight undated gilts, which make up a very small amount of the UK government’s domestic debt.
These are perpetual bonds. These gilts are very old: some date from the 18th century, such as Consols. The
largest, War Loan, was issued in the early 20th century. The redemption of these bonds remains at the
discretion of the UK government, but because of their age, they all have low coupons, and there is therefore
currently little incentive for the government to redeem them. However in early 2009 the yield on these gilts was
higher than the redemption yield on long-dated redeemable gilts, which implies that the market may be pricing
in the chance that the government may redeem these gilts at some point. Because the outstanding amounts
are relatively very small, there is a very limited market in these gilts.

[edit]Gilt   strips

Certain gilts can be "stripped" into their individual cash flows, namely Interest (the periodic coupon payments)
and Principal (the ultimate repayment of the investment) which can be traded separately as zero-coupon gilts,
or gilt strips. For example a ten year gilt can be stripped to make 21 separate securities: 20 strips based on the
coupons, which are entitled to just one of the half-yearly interest payments; and one strip entitled to the
redemption payment at the end of the ten years. The title Separately Traded and Registered Interest and
Principal Securities was created as a 'reverse acronym' for strips.

The UK gilt strip market started in December 1997.

Gilts can be reconstituted from all of the individual strips. By the end of 2001, there were 11 strippable gilts in
issue in the UK totalling £1,800 million.[4]

[edit]Maturity     of gilts
        The maturity of gilts is defined by the DMO is as follows: short 0–7 years, medium 7–15 years and long 15

        Gilts with a maturity of less than three years are also referred to as "ultra short", while the new gilts issued in
        2005 with a maturity of 50 years have been referred to as "ultra long".

        [edit]See       also

                                         List of government bonds

                                           1.   ^


                                           2.   ^ PNB Gilts

                                           3.   ^ UK Debt Management Office

                                           4.   ^

                                                                      Economy of the United Kingdom

        Categories: Government debt | Government bonds

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gilt edged security


High-grade bond issued by a national (federal) government or an established
and stable firm with a long record ofconsistent earnings, and ability to
pay its obligations on time and in full. Such securities used to have gilded edges. See
also treasuries.

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