Certificates of Deposit
A certificate of deposit (CD) is a time deposit issued by a bank with a fixed term, fixed interest rate, and fixed face value. Negotiable CDs (NCDs) are tradable in secondary markets, while retail CDs are not. Australian banks issue large quantities of NCDs in the wholesale money market, and US institutional NCDs typically come in denominations of US$100,000 or more. Interest is paid at maturity in money market form for short tenors, or periodically for longer-dated CDs. Note in this Atlas CD refers to *certificate of deposit*, not credit default swap.
Why it matters
A negotiable CD is a term deposit you can sell before maturity. A super fund locks A$100 million into a 90-day major-bank CD at 4.20% to earn a small spread over the cash rate. If a margin call hits on day 30, the fund sells the CD into the secondary market at the prevailing yield rather than breaking the deposit and forfeiting interest. That secondary tradability is what separates a wholesale NCD from a household term deposit and is why NCDs sit alongside bank bills as the workhorse of the AUD money market.
Formulas
Worked examples
An Australian super fund buys a 6-month negotiable CD issued by CBA with face value A$1 million at a yield of (assume zero-coupon discount CD for the wholesale market).
Price P = 1{,}000{,}000/(1 + 0.045 \times 182/365) = 1{,}000{,}000/1.02244 = \text{A\}978{,}046$. Interest earned at maturity = \text{A\}21{,}954$. If the fund sells the CD after 90 days at a new yield of $4.20\%$, the secondary price uses the remaining 92 days, illustrating yield-driven secondary pricing.
A US institutional investor buys a jumbo CD with face value US$10 million, 1-year term, 4.75% coupon paid at maturity.
Interest paid at maturity = 10{,}000{,}000 \times 0.0475 = \text{US\}475{,}000$. Total received = \text{US\}10{,}475{,}000$. Because the CD is above the FDIC US$250,000 retail insurance limit, the investor relies on the bank's standalone credit, which is why bank credit spreads drive jumbo CD yields.
Common mistakes
- āNegotiable CDs are illiquid. They trade in active secondary markets, particularly for major-bank issuers, and can be sold before maturity at the prevailing yield. Retail term deposits, by contrast, cannot be transferred and require early-withdrawal penalties.
- āAll CDs are government guaranteed. Only deposits below the relevant insurance limit are covered. In Australia the Financial Claims Scheme covers deposits up to A$250,000 per account holder per bank. In the US the FDIC covers up to US$250,000. Wholesale NCDs typically sit far above these caps, so the investor takes pure bank credit risk.
- āCD yields are identical to bank deposit rates. Wholesale NCD yields track BBSW or LIBOR-replacement benchmarks and respond instantly to money market conditions, while advertised retail deposit rates often lag the cash rate as banks manage their funding mix.
Revision bullets
- ā¢Bank-issued time deposit with fixed term and rate
- ā¢Negotiable CDs trade in secondary markets
- ā¢AUD pricing uses simple interest ACT/365
- ā¢Wholesale denominations above deposit insurance caps
- ā¢Credit risk reflects bank standalone strength
- ā¢In this Atlas, CD = certificate of deposit (not credit default swap)
Quick check
What distinguishes a negotiable CD from a household term deposit?
An Australian wholesale NCD of face value A$1,000,000 carries which type of risk?
Connected topics
In learning paths
Sources
- Hull (2022), Ā§4.1Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.Money market chapter covering negotiable CDs and their relation to other short-term wholesale instruments.
- Reserve Bank of Australia. Bank Funding in 2024. RBA Bulletin, April 2025.Quantifies Australian bank use of NCDs and bank bills as primary domestic short-term wholesale funding.
- Australian Prudential Regulation Authority. Financial Claims Scheme. APRA, accessed 2026.Official scope of Australian deposit insurance, capping protection at A$250,000 per depositor per ADI.
- Fabozzi (2021), Ch. 12Fabozzi, Frank J. Bond Markets, Analysis, and Strategies. 10th ed. MIT Press, 2021. ISBN 978-0-262-04627-3.Standard reference for NCD structure, pricing conventions, and the distinction from non-negotiable retail deposits.
- Federal Deposit Insurance Corporation. Deposit Insurance At A Glance. FDIC, accessed 2026.US deposit insurance limits relevant to retail CDs and the credit risk borne on jumbo institutional CDs above the cap.