What is CDI: its functioning and connection to investments

Primary indicator of the profitability of fixed income investments, the CDI rate closely tracks the Selic rate.

Text: The CDI is a widely recognized acronym in the financial market, but investors often confuse it with other similar acronyms like the DI rate.

Text: Understanding this concept is crucial, especially for individuals interested in fixed income investments, as CDI serves as a significant indicator. This guide will provide insights into the meaning of CDI and its relevance to your investment portfolio.

What does CDI stand for?

The CDI, also known as the Interbank Deposit Certificate, is a short-term financial instrument issued by banks. It functions similarly to the CDB in that it is used by institutions to raise funds. However, a key distinction is that the CDI is not available for direct investment by individual investors. As implied by its name, it is primarily used for interbank transactions, enabling banks to borrow and lend money to each other on a daily basis, with a maturity of just one business day.

The CDI’s creation is connected to the necessity for overseeing the financial system. Banks are mandated by the Central Bank to end each day with a surplus cash balance to safeguard the system’s well-being and steadiness. Nevertheless, instances of imbalance may arise, such as when a bank has more withdrawals than deposits in a day. To rectify this, the bank must compensate for the shortfall by borrowing funds, typically through issuing a CDI that is bought by another bank.

Impact on financial decisions

While individuals cannot access the CDI directly, it significantly impacts investments due to the interest it generates. Banks engage in operations involving CDIs, accruing interest that is documented by B3. B3 calculates the average interest rate from these transactions, referred to as the “DI rate” or “CDI rate.” This daily rate represents the average interest from interbank transactions and is widely recognized as a benchmark in the financial market.

Although the DI rate is typically calculated on a daily basis, it can also be calculated monthly or annually. It is commonly used as a measure to assess the profitability of fixed income investments.

This is how the CDI is linked to your investments. The typical interest rate in interbank transactions acts as a benchmark for various fixed-income products. Therefore, it is usual for the returns on instruments like CDBs, Real Estate Credit Letters, Agribusiness (LCI and LCA), or debentures to be stated as a percentage of the CDI.

Furthermore, the DI rate is commonly utilized for assessing the effectiveness of fixed income funds. If the lowest return falls below the DI rate during a specific time frame, it suggests that better outcomes could have been achieved. Conversely, a higher yield compared to the DI rate indicates a successful performance.

What is the connection between CDI, Selic, and the DI rate?

If you are familiar with CDI, you probably have also come across the term Selic. Selic, short for “Special Settlement and Custody System,” is regarded as the fundamental interest rate in the economy. It is utilized in financial transactions among banks, distinguished by the use of public securities as collateral.

Every 45 days, the Copom, or Central Bank Monetary Policy Committee, convenes to establish the Selic rate, a topic frequently discussed in news related to macroeconomics and investments.

The Selic rate serves as a stabilizing factor for the economy, which is why it often closely aligns with the DI rate. This is due to the fact that CDIs, which are interbank loans, are also linked to the Selic rate. Therefore, while not identical, these rates tend to move in parallel and show similar patterns.

Impact of the CDI on investments

The CDI rate plays a crucial role in determining the profitability of fixed income investments. Various financial products are linked to this rate, with some using it as a reference point or performance target. Additionally, certain investments across different categories, like certain multimarket funds, also incorporate the CDI as a key parameter.

When the CDI rate goes down, investments tied to this index typically yield less profit. Conversely, when the CDI rate rises, these investments generally offer higher returns. The fluctuations in the CDI rate can also have indirect impacts on investments not directly associated with it.

What is the definition of achieving a 100% return on the CDI?

Many investments provide returns based on the DI rate, typically stated as a percentage. For instance, if a CDB (or LCI, debenture, or similar investment) offers a return of 100% of the CDI, it means that the investment’s yield will be comparable to the average interbank loan rate.

If the CDB provides 80% of the CDI, the investor will receive just 80% of the DI fee. Yet, in both scenarios, there is a shared characteristic: if the DI rate goes up while the investment is held, the investor’s return will also go up. Conversely, if the DI rate falls, the return will decrease.

These investments are categorized as post-fixed, as the investor is aware of the reference indicator (the CDI) but cannot forecast the final return, which is contingent on changes in the DI rate during the investment period.

Investments associated with the CDI benchmark.

Different types of investments have returns that are connected to the CDI rate. Some instances include CDBs, LCIs, LCAs, debentures, CRIs, CRAs, and DI funds. Find out more about each of these options below.

Certificate of Deposit Bonds

Banks issue Bank Deposit Certificates (CDBs) in order to gather funds for their lending activities. These securities, widely available through financial institutions, are highly favored by investors.

In most cases, major banks’ Certificates of Deposit (CDBs) have a modest initial investment requirement (typically under R$ 1,000). These investments usually have variable interest rates tied to the CDI rate. Income from CDBs is subject to income tax, with rates ranging from 15% to 22.5%. Furthermore, CDBs are backed by the Credit Guarantee Fund (FGC), offering additional security for investors.

LCI and LCA refer to Letters of Credit and Letters of Credit in Agribusiness.

The FGC provides assurance for Real Estate Credit Letters (LCI) and Agribusiness (LCA), which share similarities with CDBs. These are issued by banks when they are connected to credit activities in the real estate or agribusiness industries. The activities of these credit portfolios serve as a foundation for the issuance of LCIs and LCAs.

Credit letters, typically linked to the CDI and issued after the fact, are widely used and tend to offer slightly lower returns compared to other fixed income investments. This is due to the tax exemption on LCIs and LCAs for individuals. Despite the relatively lower profitability, the tax benefit makes these credit letters appealing to investors.

Text: Bonds

Businesses issue debentures in the financial market as debt instruments, which sets them apart from banks. Typically, companies use the funds raised from debentures to finance significant projects, resulting in longer maturity periods compared to other types of fixed-income investments.

Many debentures offer a fixed rate of return tied to the CDI percentage. Most debentures are subject to a decreasing income tax rate, except for incentivized debentures which are tax-exempt for individuals. It is worth mentioning that debentures do not benefit from the Credit Guarantee Fund (FGC) protection.

CRI and CRA abbreviations

The Certificates of Real Estate Receivers (CRIs) and Agribusiness (CRAs) are fixed income securities. CRIs are backed by receivables from the real estate sector, such as real estate financing, whereas CRAs are supported by receivables related to agribusiness, such as loans for agricultural production.

For example, consider a developer who has sold individual units in a building. Even though buyers have agreed to pay in installments, the developer might require immediate funds. To address this situation, the developer could bundle these future payments into a Real Estate Receivables Certificate (CRI) and trade it on the market. By doing so, the developer shifts the debt to new creditors and receives the necessary resources upfront.

Many CRIs and CRAs offer returns linked to the CDI. One benefit of these investments is that individuals can enjoy tax exemptions, similar to what is offered with LCIs and LCAs. However, unlike LCIs and LCAs, CRIs and CRAs do not have the protection of the Credit Guarantee Fund (FGC).

Text: Basic backgrounds

Basic fixed-income funds invest at least 95% of their funds in government bonds and fixed-income securities issued by financial institutions with a risk level comparable to government bonds, such as large bank CDBs, or in similar low-risk investments.

These funds seek to mirror the CDI rate’s performance by only charging an administration fee and not collecting a performance fee. Investors utilize derivatives to safeguard their portfolios against losses and market volatility, without venturing into foreign investments. Due to their nature, these instruments are suitable for conservative investors or beginners in the financial market.

Text: Excerpt from Infomoney’s article: Understanding CDI: Definition, function, and its impact on your investment decisions.