Insured Deposits
Insured deposits are the safest cash equivalents because they carry a government guarantee. Understanding what Federal Deposit Insurance Corporation (FDIC) insurance covers (and what it does not) is one of the most frequently tested distinctions on the exam.
Demand Deposits (Checking Accounts)
- 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.
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
Negotiable vs. Non-Negotiable CDs
The exam tests this distinction heavily:
| Feature | Negotiable CD (Jumbo CD) | Non-Negotiable CD |
|---|---|---|
| Face value | $100,000+ | Any amount |
| Secondary market | Yes - can be traded | No - must hold to maturity or redeem with bank |
| Issued by | Large commercial banks | Any bank or credit union |
| Liquidity | Higher (tradeable) | Lower (early withdrawal penalty) |
| Typical buyers | Institutional investors | Retail depositors |
- Negotiable CDs (also called jumbo CDs) have face values of $100,000 or more and can be bought and sold in the secondary market like a bond
- Non-negotiable CDs must be held to maturity or redeemed directly with the issuing bank, usually with an early withdrawal penalty
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.
FDIC Insurance - What You Need to Know
- 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).