Title: The design of bank-issued market-indexed certificates of deposit - survey, pricing and empirical test

Authors: Rodrigo Hernández; Jorge Brusa; Daniel Pu Liu

Addresses: College of Business and Economics, Radford University, Radford, VA 24142, USA ' Sanchez School of Business, Texas A&M International University, Laredo, Texas, 78041, USA ' Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701, USA

Abstract: In this paper we make a survey of market-indexed CDs and list 11 factors that must be taken into account in the design of market-indexed CDs. We extend the pricing model developed by Hernandez et al. (2011), which was a non-coupon paying market-indexed CD model, into a model in which the market-indexed CD pays coupons. Moreover, we apply the models developed in Hernandez et al. (2011) to market-indexed CDs to calculate the costs and profits for issuing market-indexed CDs. The results of the empirical tests indicate that the model can estimate the pricing of market-indexed CDs accurately.

Keywords: certificates of deposit; market indexed CDs; MICD; structured products; option pricing; financial innovation; pricing models.

DOI: 10.1504/IJFMD.2012.053337

International Journal of Financial Markets and Derivatives, 2012 Vol.3 No.1, pp.45 - 60

Received: 08 Mar 2012
Accepted: 05 Jan 2013
Published online: 30 Aug 2014 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article