1. What is it?
In Portuguese CDB stands for Bank Deposit Certificate and RDB stands for Receipt for Bank Deposit. They are both issued by banks registered with the Central de Custódia de Títulos Privados – Cetip (or Private Bond Custody Center, in loose translation. This is an open society company that offers services to the financial market in Brazil) and sold to the public as a way to raise funds through the use of bank branches. Banks use part of these funds to finance Consumer Direct Credit (or CDC in Portuguese) by overdraft banking services, company cash flow loans, acquiring goods and assets and so on.
CDBs and RDBs are bonds that represent a debt from the institution to the investor. These bonds may be prefixed, with a premium set upon the hiring date, or post-fixed, adjusted according to the DI over, where the investor is paid a percentage of the market’s overnight rate.
CDBs are dealt from an annual gross interest rate and don’t take into account inflation or taxation. Besides, they may be traded at any point inside the duration of the contract but, when this duration is smaller than the minimum set (30, 60 or 90 days for prefixed bonds), these applications are burdened by tax on financial transactions (or IOF, in Portuguese). Also, all CDBs are burdened by income tax (or IRF, in Portuguese).
Some CDBs may be redeemed before previously set deadline and some may not. As for RDBs, they can’t be traded or transferred before the deadline. However, should one sell the CDB before the deadline they may incur in a loss of profitability. This happens because the buyer – meaning the bank that sold the bond – may, in accordance with the current market situation, demand a spread or a back-payment on the goodwill allocated to generate the liquidity required by the seller (or the person that initially hired the CDB).
The advanced redemption if made through a new rate calculation. Meaning the re-purchase is done according to the rate the market is trading on at the time of the redemption. This way there’s no guarantee the rate initially accorded will be preserved if one redeems the bond in advanced – it can be greater or smaller than the previously set when the bond was hired.
Payment rates on the CDB depend on how much money the bank needs and on the amount available to the investor. In addition, the rate is directly linked to the security of the bank: a safer bank has less attractive rates than a small or medium size bank. Because of a bank’s fixed operational cost and the client’s interest, larger investments tend to pay better than small ones. For investments redeemed only upon the due date, however, the previously hired rate is guaranteed.
Rate may be prefixed, post-fixed or floating and may have more than one payment base, provided the best option for the client prevails. Usually, the CDB is linked to payment on the Interbank Deposit Rate (or CDI, in Portuguese). One should always look for banks paying closest or over 100% of the Interbank Deposit Rate. This will guarantee more profitability to the bond. Unlike the common savings account, where the payment is only made one month after the initial investment, CDB profitability is daily. This means it generates profits every single day. CDBs also have high market liquidity. If you check your CDB balance every day, it’ll always show profit over the previous day.
Redemption of the CDB before 30 days, if that’s a possibility, will be charged tax on financial transactions calculated with the use of the regressive table (available under the “Taxation” heading, below) – which will negatively affect the profitability. Profitability is also impacted by income tax.
In some cases, one might be under the impression that the CDB profits more than the common savings account. Usually the payable profits are bigger, but the mandatory income tax withheld might cause the full amount to be smaller, considering there is no income tax burden over the common savings account. Therefore, caution is required when calculating your profits.
The CDB is a fixed income bond and therefore has a low risk. The biggest risk one incurs into pertains to the reliance of the bank where the investment was made. This means that if the bank goes bankrupt it may not pay its investors. CDB investment is, however, guaranteed by the Credit Guarantee Fund for up to R$ 250 thousand if the institution chosen is associated to the CGF.
Another risk associated with the CDB is the possibility of the profits being smaller than the inflation rate over the period of the investment.
Risk and profitability are intimately connected. The bigger the risk, the greater the profit. There are less dependable banks. Nonetheless, they tend to pay great percentages on the Interbank Deposit Rate. So rates that could be considered magically higher than the Interbank Deposit Rate may require some inquiry over the health of the institution in order to minimize risks.
Investment on CDB and RBD may incur into two types of taxes:
1. Income tax: Income tax burden decreases according to the duration of the investment.
- Investment of up to 180 days: 22,5% (only over profits)
- Investment from 181 to 360 days: 20% (only over profits)
- Investment from 361 to 720 days: 17,5% (only over profits)
- Investment over 720 days: 15% (only over profits)
2. Tax on financial transactions (IOF, in Portuguese): For investments during 30 days or less, tax on financial transactions is payable as per the table below:
|Number of consecutive days from date of investment||Percentage of profits subject to taxation (%)|
One needn’t worry about paying the taxes due. The bank will be responsible for withholding the correct amount and forwarding it to the IRS. Upon the CDB’s due date one will receive the gross profits amounted over the duration of the investment minus the withheld income tax.
The bank selling the bond might also charge an operational fee. This is also cause for caution, considering some banks have no CDB investment fees – and therefore should be favored over those that do.
5. How it works
CDBs and RBDs are traded only by banks. Account managers are trained to give general information on the subject to potential investors. Some banks also offer investment options via internet, offering specialized – and excellent – rates:
100% of the Interbank Deposit Rate indicates payment of the same percentage as the Interbank Deposit Rate over the number of days of the investment.
90% of the Interbank Deposit Rate means only 90% of the rate should be used to calculate profits over the duration of the investment. This a common practice on dependable, solid institutions.
102% of the Interbank Deposit Rate means the rate used to calculate profits is actually greater than the full Interbank Deposit Rate. Usually a practice of smaller institutions.
Banks that charge no operational fees and pay 100% of the Interbank Deposit Rate are rare, but, if found, should be favored. As per common practice, longer investments tend to pay bigger Interbank Deposit Rate percentages.
Once the amount to be invested was decided upon and the most favorable rate found, one should decide on the duration of the investment and opt for prefixed or post-fixed rates. The main difference between the two is that, with prefixed rates it’s easier to calculate exactly how much profits will be paid upon the due date. Post-fixed rates vary according with the Interbank Deposit Rate, which tends to make projections harder.
Upon reaching the due date profits should have income tax subtracted and the bank will withhold and destine the amount directly to the IRS.
6. Types of CDB’s
CDB – Prefixed
The prefixed CDBs are bonds that have no minimum duration period and cannot be scheduled to have their due date fall on a Saturday, Sunday or Holiday. Profitability in these bonds is determined when the investment is made, and the future amount payable is, consequently, predetermined. During economic crisis and decreasing market tendencies for interest rates banks tend to favor raising funds through issuing prefixed long term CDBs. This also configures the ideal moment for the investor to choose this bond, considering the profitability rate is fixed. Post-fixed rate links for CDBs may imply on a less profitable bond if the market tendency is for decreasing interest rates.
CDB – Post-fixed
Post-fixed CDBs may be offered by banks with or without daily liquidity, and will perform in accordance with indicators such as the Interbank Deposit Rate or Benchmark Rates (in Brazil, specifically the TR rate). These bonds are popular when interest rates are expected to rise. This means the increasing interest rate might pull the CDB rate with it, making it more profitable. This option, however, doesn’t allow for rate determination at the time of purchase – only at the time of redemption.
CDB – with Swap
CDBs with swap are bonds that may be traded with prefixed or post-fixed profitability rates, according to the performance of indicators such as the SELIC rate (the Brazilian prime rate), the reference exchange rate or the Interbank Deposit Rate. Usually for this option the minimum investment amount is larger than with the other CDB types, normally above the R$ 100 thousand mark.
Swap CDBs focus on a more greatly funded investor. The minimum investment is set on R$ 100 thousand in some banks, while others may ask for values as high as R$ 500 thousand. On this option profitability is traded via a swap contract between bank and client. This swap has to be registered with CETIP.
In this option for CDB you have three basic versions that configure the most common variations:
- CDB with Interbank Deposit Rate (where the profitability of the CDB is traded for a percentage of the Interbank Deposit Rate),
- CDB with prefixed Swap (where the profitability is traded for a prefixed cashback)
- CDB with Dollar swap (where the cashback is traded for a prefixed rate plus the Dollar exchange rate variation).
When entering into a swap contract the investor will be trading the original profitability of the CDB for the profitability of the chosen index. At the end of the contract period the profitability will be calculated for both the CDB and the index, and the difference between the two will be settled – by the bank toward the investor (if the index grows over the CDB rate) or by the investor toward the bank (if the index closes in a lower level than the CDB). For income tax calculations the profits should be those of the CDB plus the profits from the swap contract, should they exist. This option, for normal persons or companies, is indicated for investors looking for protection against index or currency variations. As an example, if an investor has a loan payable in Dollars, the CDB with swap option could be a good way to reduce exposure to the exchange rate inherent risks.
CDB – DI over
These are the most common CDBs in the market. Their profitability is directly linked to the DI over variation. Usually, banks pay a percentage over the DI over. The rate is published daily by CETIP and simply consists of an average of the trades between financial institutions: banks loan money to one another and the average rate of those operations will define the DI over for that specific day.
CDB – Rural
This type of CDB focuses on raising funds for agricultural financing. The characteristics of this CDB are identical to all other options listed here – except for one small detail. All money raised with this type of bond needs to be destined to funding the sale of agricultural goods, machinery and equipment. The bank responsible for issuing the bond has to file the proof with the Brazilian FED, or the Brazilian Central Bank.
CDB – Broad Consumer Price Index (or IPCA, in Portuguese)
This type of CDB is best indicated for an investor that wishes to protect themselves against the inflation. Banks usually pay a small yearly prefixed rate at the time of purchase plus the monthly variation of the Broad Consumer Price Index (or IPCA, in Portuguese). This index is calculated by the IBGE, the Brazilian National Institute for Statistics and Geography, and is actually the official inflation index for the country.
In a CDB linked to the IPCA, usually, the prefixed rate plus the IPCA rate get much closer to the SELIC rate. However, since the inflation has a monthly variation, more profitability might be attained in this variation over the SELIC rate. To invest in this type of bond one should favor high inflation periods, to insure maximum profitability. This also is a type of CDB that will very rarely be redeemable in advanced.
In order to evaluate of the CDB linked to the IPCA is profiting more than the CDB-DI over one can simply add the rates: the greater rate will obviously represent greater potential for profits.
CDB – General Market Price Index (or IGPM, in Portuguese)
The CDB linked to the General Market Price Index (or IGPM, in Portuguese) bears a resemblance to the CDB linked to the IPCA. The IGPM is calculated by FGV (Getulio Vargas University, a very respected university in Brazil) and analyses variations of prices inside specific sectors of the economy. This index also has a monthly variation.
Characteristics of this CDB are: a prefixed rate at the time of purchase plus the monthly variation of the IGPM. The investor is advised to choose this investment on periods when the index reaches a hike or when it shows upward tendencies.
CDB – Consumer Price Index (or INPC, in Portuguese)
On this CDB option banks usually pay a small yearly prefixed rate established at the time of purchase plus the monthly variation of the Consumer Price Index (or INPC, in Portuguese). The INPC is also calculated by the IBGE and it measures the cost variation on food, clothing, living, personal expenses and such. This index also varies monthly and the investor is advised to choose this option when the index is hiking or showing upward tendencies.
Profits more than the common savings account (however less than other types of investments);
Some CDBs may be redeemed before the due date;
Follows the Interbank Deposit Rate;
Offers the possibility of following important indexes such as the inflation;
Offers the possibility of swapping indexes (exclusive to larger investments);
Is guaranteed by the Credit Guarantee Fund for up to R$ 250 thousand;
Demands a low minimum investment, starting at R$ 100 (Except for the swap option).
- Some CDBs demand an investment period of over one year to show a good profitability;
- Is burdened by income tax;
- Low profitability of compared to other types of investments;
- May not be redeemable in advanced;
- May only be profitable if redeemed exclusively on the due date;
- May be a bad choice of investment if the SELIC rate is low.