Computing Yields on Enhanced CDs

Authors

  • Robert Brooks The University of Alabama, 200 Alston Hall, Tuscaloosa, AL 35487

DOI:

https://doi.org/10.1016/S1057-0810(96)90025-6

Abstract

In this paper, we seek to provide a framework for comparing certificates of deposit (CD) products that vary in their features. There are now fixed-rate CDs with no early withdrawal penalties as well as floating-rate CDs with guaranteed floors. With the model developed here, we examine the required change in the effective annual rate required in basis points to make CD products with embedded derivatives (called enhanced CDs) comparable with the standard CD products (ones with large early with- drawal penalties). This framework is beneficial for both retail customers seeking to make rational comparisons and bank executives seeking to provide optimal liability products and seeking to manage the resulting interest rate risk

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Published

1996-06-30

How to Cite

Brooks, R. (1996). Computing Yields on Enhanced CDs. Financial Services Review, 5(1), 31–42. https://doi.org/10.1016/S1057-0810(96)90025-6

Issue

Vol. 5 No. 1 (1996): Financial Services Review

Section

New Original Submission

License

Copyright (c) 1996 JAI Press Inc.

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