Valuing The Withdrawal Option In Retail Cd Portfolios

    Authors

    J. H. Gilkeson;C. K. Ruff

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    Abbreviated Journal Title

    J. Financ. Serv. Res.

    Keywords

    Business, Finance

    Abstract

    A retail certificate of deposit (CD) is a bank-originated, fixed-rate, fixed-term, federally insured liability containing an option that allows the early withdrawal of funds by the depositor upon payment of a prespecified penalty. Failure to estimate the effects of withdrawals from a bank's CD portfolio results in inaccurate estimates of the value of its equity, as would failure to estimate prepayments from its mortgage portfolio. Using techniques from mortgage portfolio valuation, this article develops a method for valuing a portfolio of CDs that includes a model of early withdrawals. This method makes it possible to calculate an interest rate equivalent for the cost of the withdrawal option and to correctly measure interest rate risk. We present a brief case study from a small, Midwestern bank and a set of simulations over a variety of potential interest rate paths.

    Journal Title

    Journal of Financial Services Research

    Volume

    10

    Issue/Number

    4

    Publication Date

    1-1-1996

    Document Type

    Article

    Language

    English

    First Page

    333

    Last Page

    358

    WOS Identifier

    WOS:A1996WD38600002

    ISSN

    0920-8550

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