Time deposits are another name for certificates of deposits, which are promissory notes issued by banks to people hoping to gain a bit of interest on a savings principle. The promissory note for these time deposits promises to pay the investor a certain percentage of interest in exchange for investing with the bank. When it comes to most types of time deposits, 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, so most people consider traditional CDs to have low liquidity, especially when compared to investments like stocks or commodities.
Understanding Traditional CDs
A traditional certificate of deposit is a type of investment offered by most financial institutions. The money is invested for a predetermined amount of time at a predetermined interest rate that both the bank and the investor agree on. The investment period typically varies from one month to five years. Higher interest rates are given to longer-term investments.
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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 Once invested, the money cannot be withdrawn before the maturity date, or the owner incurs an early withdrawal penalty fee that can sometimes be much more than the interest they have earned on the principle investment.
Investopedia reports that bank-issued CDs are insured by the Federal Deposit Insurance Corporation. The current FDIC limit is up to $250,000. This level of protection helps to provide a certain level of investor confidence for those who do not invest larger sums of money in CDs.
Liquid CDs 101
Liquid CDs are a cross between a savings account and a traditional CD. They are also called risk-free CDs or no-penalty CDs.
Bankrate reports that 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. For those who are deterred by the lack of liquidity in traditional CDs, this can be a viable alternative. 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 other types of savings options. Bank-issued CDs are insured by the FDIC.
Brokered Certificate of Deposit
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.