Insured Deposits

Insured deposits sit at the safest end of the cash-equivalent spectrum because FDIC insurance, not the bank's own credit, backs the principal. That insurance is what separates a bank deposit from the money market instruments covered later in this unit, several of which (like Treasury bills) are also government-backed but are not FDIC-insured deposits.

What Are Demand Deposits?

• Demand deposits are funds held in checking accounts at banks
• Funds are available on demand - you can withdraw at any time without prior notice
• Typically earn little to no interest
• FDIC insured up to $250,000 per depositor, per insured bank, per ownership category

Think of it this way: A checking account is like cash in your pocket; you can spend it instantly, but it earns you nothing while it sits there. A CD is like lending your cash to a friend for six months in exchange for interest; you get a better return, but you cannot use it until the agreed time is up.

What Are Certificates of Deposit (CDs)?

• Certificates of deposit are time deposits with a fixed maturity date and a fixed interest rate
• The depositor agrees to leave funds with the bank for a specified period (weeks to years)
• Early withdrawal typically incurs a penalty (forfeit of some interest earned)
• FDIC insured up to $250,000 per depositor, per insured bank
• Considered very low risk due to the FDIC guarantee and fixed return

How Do Negotiable and Non-Negotiable CDs Differ?

The exam tests this distinction heavily:

Exam Tip: Gotchas

• Both negotiable and non-negotiable CDs are FDIC insured (up to $250,000). The difference is transferability, not safety. A negotiable CD can be sold to another investor; a non-negotiable CD cannot.

What Does FDIC Insurance Actually Cover?

• Coverage: $250,000 per depositor, per FDIC-insured bank, per ownership category
• Ownership categories are insured separately; a single depositor can have more than $250,000 insured at one bank if funds are held in different ownership categories (individual, joint, retirement, trust, etc.)
• Applies to: Checking accounts, savings accounts, money market deposit accounts, CDs
• Does NOT apply to: Stocks, bonds, mutual funds, annuities, life insurance policies, or money market funds, even if purchased through a bank

Exam Tip: Gotchas

• FDIC insurance covers bank deposits only. Not securities, mutual funds, or annuities, even if purchased through a bank branch. If a question asks about buying a mutual fund at a bank, the answer is "not FDIC insured."
• The $250,000 limit is per depositor, per bank, per ownership category. It is not per account. A single depositor can have more than $250,000 insured at one bank if funds are in different ownership categories (individual, joint, retirement, trust).

What Should You Check on Exam Day?

• Demand deposits and CDs are both FDIC insured; the CD's fixed maturity and early-withdrawal penalty are the tradeoff for a better rate, not a loss of insurance
• Negotiable (jumbo) CDs start at $100,000 face value, trade in a secondary market, and are issued by large commercial banks; non-negotiable CDs cannot be sold and must be held to maturity or redeemed early with the issuing bank (with penalty)
• The $250,000 FDIC limit applies per depositor, per bank, per ownership category, not per account
• FDIC insurance never extends to securities, mutual funds, annuities, or life insurance, even when purchased through a bank