Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What are short-term securities issued by commercial banks in exchange for fixed-term deposits called?

1. Bank notes

2. Certificates of deposit

3. Commercial papers

4. Debentures

The correct answer is: Certificates of deposit

Short-term securities issued by commercial banks in exchange for fixed-term deposits are known as certificates of deposit (CDs). These financial instruments represent a specific amount of money that is deposited with the bank for a predetermined period of time, typically with a fixed interest rate. The primary purpose of a CD is to provide a safe investment option for individuals and businesses looking to earn interest on their deposits while ensuring that their funds will be available at the end of the term. Certificates of deposit have specific characteristics: they usually offer higher interest rates compared to regular savings accounts, and they require that the funds remain deposited for a certain duration, which can range from a few weeks to several years. Moreover, withdrawing funds before the maturity date generally results in penalties. Understanding this context differentiates CDs from other options. For example, bank notes are written promises to pay a specific sum of money, often used in informal transactions. Commercial papers are short-term unsecured promissory notes issued primarily by corporations to finance their working capital needs, not specifically by banks for deposits. Debentures are a type of long-term security that reflects a loan made by an investor to a borrower, usually a corporation or government, and is backed by the issuer's creditworthiness rather than specific assets.