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Savings accounts at a bank with funds unavailable for withdrawal for a predetermined period of time are called time deposits. Time deposits bring higher yield, than regular savings accounts. In exchange your funds are unavailable for months or years. The Certificate of Deposit (CD) is the most common type of time deposit in the United States. The higher the deposit amount and the longer the term, the greater the annual yield.

Functions

1. To lend money banks need to receive customer deposits. They can’t loan money from demand deposits like checking accounts and savings accounts, because the account holder can ask for money at any time. So to establish time deposits, banks pay higher interest to entice customers. The bank can offer a customer a five-year CD with three percent interest. If the customer agrees, the bank can loan that money to another customer, for four years with eight percent profit. In such way bank makes a profit.

Types

2. There are two types of CD: jumbo and regular. A CD account with $100,000 or more must be opened by a bank customer to qualify for jumbo CD rates. Jumbo CD rates are higher than regular CD rates. FDIC insurance limits were raised from $100,000 to $250,000 after the market crash of 2008.Now investors are able to deposit with the peace of mind that their investment is insured.

Time Frame

3. Customers can choose how long they want to keep their funds on deposit. There are different terms – from one month till five years. If you are cashing a CD before its maturity you can be penalized. The principal amount invested can never be penalized.

Potential

4. Though time deposits have non-existent risk and insured status their growth potential is fairly limited. So they are not ideal for long term growth strategies.

Expert Insight

5. Laddering is a popular technique for investing in time deposits. Available funds are divided among several different terms of CD, not investing the entire amount in one CD.