Certificate of deposit usually has low liquidity due to the practice of money withdrawal associated with it.
Explanation:
A certificate of deposit (CD) is a security certifying the existence of a deposit account with a bank. How does a certificate of deposit work? In practice, an account may not be open – an enterprise buys a certificate of deposit from a bank and can sell it to anyone. Therefore, in the market, such certificates are perceived as an analog of a regular bill of exchange. A certificate of deposit has a number of advantages for customers compared to a regular deposit account and bill of exchange. On average, their yield is higher than that of bills of similar urgency. In this case, the yield of the certificate is fixed after the purchase, in contrast to the deposit. Certificate of deposit rates, according to the bank agreement, often depend on the market situation, the rates of return on certificates of deposit do not change throughout the life of the paper.
How do CDs work in terms of early repayment? Unlike holders of bills, certificate holders do not lose anything with the early redemption of paper. The bank can refuse early repayment of the bill, and if it repays it, then in most cases, the bill holder’s income will be less than planned. In case of early repayment of the certificate, the bank is obliged to pay the deposit amount fully, and some banks also pay a small percentage corresponding to the yield of the demand deposit. A certificate, according to bankers, is more reliable than a bill due to the nature of its issuance. Certificates of deposit are issued on individual forms registered by the Central Bank.