Insured Deposits

Cash equivalents are short-term, highly liquid instruments readily convertible to known amounts of cash with minimal risk of price change. Insured bank deposits are considered cash equivalents and offer the highest level of safety because they are backed by the FDIC (Federal Deposit Insurance Corporation). The key trait of cash equivalents is principal preservation - not growth or income maximization.

Memory Aid: FDIC coverage = $250K per depositor, per insured bank, per ownership category. Two types of insured deposits: demand deposits (instant access, lowest return) and time deposits / CDs (locked term, higher return).

FDIC Insurance

• Covers deposits at FDIC-member banks up to $250,000 per depositor, per insured bank, per ownership category
• Coverage applies to principal + accrued interest (combined must stay within the limit)
• Separate coverage for each ownership category (individual, joint, trust, retirement, etc.)
• Does NOT cover: investment losses, stocks, bonds, mutual funds, annuities, life insurance policies
• Credit unions are insured by the NCUA (National Credit Union Administration) - same $250,000 limit

Demand Deposits

Demand deposits are accounts where funds can be withdrawn on demand without prior notice or penalty. They are the most liquid form of cash equivalent.

• Include: checking accounts, savings accounts, money market deposit accounts (MMDAs)
• MMDAs may offer limited check-writing privileges and higher interest than basic savings
• Pay little to no interest (trade-off for maximum liquidity and safety)
• Insured by the FDIC up to $250,000 per depositor, per insured bank, per ownership category

Think of it this way: Demand deposits are the safest place to park money. You sacrifice nearly all return in exchange for instant access and government-backed insurance.

Exam Tip: Gotchas

• Money market deposit accounts (MMDAs) at banks are FDIC-insured. Money market mutual funds are NOT FDIC-insured; they are securities regulated by the SEC (Securities and Exchange Commission). The exam tests this distinction.

Certificates of Deposit (CDs)

CDs are time deposits - the depositor agrees to leave funds for a specified period in exchange for a stated interest rate. Issued by banks and other depository institutions.

• FDIC-insured up to $250,000 per depositor, per bank, per ownership category
• Maturities range from 7 days to several years (most common: 3 months to 5 years)
• Early withdrawal penalty applies if redeemed before maturity (forfeiture of some or all interest)

Types of CDs

Negotiable CDs

• Minimum denomination typically $100,000 (often $1 million+)
• Can be bought and sold in the secondary market before maturity
• Market price fluctuates with interest rates; selling before maturity may result in gain or loss
• FDIC insurance covers par value + accrued interest up to $250,000; does NOT protect against market losses from selling early

Brokered CDs

• Purchased through a brokerage firm rather than directly from a bank
• Can represent CDs from multiple banks - allows investors to stay within FDIC limits at each bank
• Tradable in secondary market (subject to market risk if sold before maturity)
• No early withdrawal penalty (sell in market instead), but market price may be below par

Exam Tip: Gotchas

• FDIC insurance on CDs protects against bank failure, NOT against market losses from selling a negotiable or brokered CD in the secondary market before maturity. If interest rates rise, the CD's market value falls below par.
• Standard bank CDs are NOT negotiable; brokered and negotiable CDs are. A standard CD can only be redeemed at the issuing bank (with penalties), while negotiable and brokered CDs can be sold on a secondary market.