What is a certificate of deposit index?

A certificate of deposit index refers to a published set of yields or dealer bid
rates on 3-month certificates of deposit reported by the Federal Reserve Statistical Release
over a 12-month average. The certificate of deposit index is calculated for the purpose of setting
adjustable-rate mortgages rather than dependence on a volatile rate.

Usually, the Certificate of Deposit Index is done over a period of 360 days. Lenders are free to
opt for any rate under the published index by which interest over a mortgage will be tied to. But
borrowers also have a wide variety of lenders to choose from. A borrower may choose any of
the lenders with whose rates she is comfortable with.

To calculate the Certificate of Deposit Index, the Federal Reserve makes use of the information
given by banks and dealers to prepare the index. The certificate of deposit index is also used to
determine the interest rates banks would pay monthly on ARMs.

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