Certificates of deposit (or "CDs") are dollar-denominated fixed-income investments issued by financial institutions.
CDs are similar to the CDBs, LCIs, and LCAs popular with investors in Brazil.
These certificates are especially indicated for conservative clients and clients seeking periodic income.
When thinking about CDs, investors should consider the following:
Maturity: usually 1, 3, 6, 12, 24, 36 months, or even longer.
Remuneration and coupons: the rate offered and the interest distribution rate.
Credit risk: the credit risk of the CD issuer.
The guarantee by the US government, the FDIC (similar to the FGC in Brazil).
Conditions for redemption before maturity, if any, or cost (spread) for redemption before maturity
Typically, CDs are FDIC-backed, with the same credit risk as the US government (provided the limit of $250,000 per customer is observed). In this case, the compensation offered by the CDs will be slightly higher (but not much higher) than the compensation offered by the US government.
Let's take a practical example simulated on the Interactive Brokers investment platform.
We access the most popular CD options on the platform and obtain a list of certificates with different maturities, issuers, and remuneration.
Let's take as an example the last CD on the list, the MS Corp CD 3.4, expiring on September 9, 2024.
The very name of the CD already suggests its most important characteristics.
Maturity: on September 9, 2024. In other words, to redeem earlier, it would be necessary to sell the security in the market.
Remuneration and coupons: the remuneration rate varies over time. When we quoted, the rate was 4.82% (see next to title name, "ask"). The CD distributes yields semi-annually of 3.4% per annum (i.e., two installments of 1.7% per annum).
Credit risk: the risk is Morgan Stanley's, one of the largest banks in the USA. It is an excellent credit risk.
The guarantee by the US government, the FDIC (similar to the FGC in Brazil): Yes.
Conditions for redemption before maturity, if any, or cost (spread) for redemption before maturity: the cost to sell in the market varies over time. At the time we quoted, the cost was 0.38% (the difference between the Ask and the Bid indicated next to the name of the CD). The cost was close to a month's fee remuneration.