Three Types of Time Deposits

Banks use CDs to gain investors.

Time deposits, also known as certificates of deposits, are promissory notes issued by banks. The promissory note promises to pay the investor a certain amount of interest in exchange for investing with the bank. On most CD types such as a traditional CDs, interest is paid when the CD matures. Because it is an investment, banks have restrictions on withdrawing money from CDs.


Traditional CDs

A traditional certificate of deposit is a type of investment offered by financial institutions. The money is invested for a predetermined amount of time at a predetermined interest rate. The investment period typically varies from one month to five years. Higher interest rates are given to longer term investments. As the investment reaches maturity, the owner has the option of rolling over into another CD or cashing in the CD. Once invested, the money cannot be withdrawn before the maturity date, or the owner incurs an early withdrawal penalty fee. Bank issued CDs are insured by the Federal Deposit Insurance Corporation. The current FDIC limit is up to $250,000.


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Liquid CDs

Liquid CDs are a cross between a savings account and a traditional CD. They are also called risk-free CDs or no penalty CDs. Liquid CDs are locked in at a fixed rate but the owners are able to initially withdraw money at any time without a penalty. The bank determines the amount of withdrawals a person can make without incurring a penalty. By law, the investor must wait a minimum of seven days before making the first withdrawal but some banks impose an additional waiting period. The interest rate on a liquid CD is lower than the interest rate on a traditional CD with the same investment terms because of the increased flexibility. Liquid CD rates are typically higher than savings account interest rates. Bank issued CDs are insured by the FDIC.


Brokered CD

Brokered CDs are bought by a broker from a bank and then resold to the broker's customer. The certificate maturity depends on the CD. Some broker CDs mature in as little as seven days. Interest is paid at the time of maturity when the CDs matures within a year. On CDs with a maturity date beyond a year, interest is paid semi-annually. Broker CDs are sold on a national competitive market and yield a higher interest rate than traditional CDs. Depending on the issuer, the brokered CD may not be FDIC insured.


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