Certificates of Deposit ("CDs") are interest-bearing, FDIC insured investments offered by banks and savings & loans. CDs are known as "time deposits," because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. In exchange for tying up principal, the association earns a guaranteed return at a set percentage rate locked in at the time of purchase.
A CD's return is payable when the CD matures, i.e., at the end of a predetermined period of time. In exchange for higher rates of return, CDs do not have the liquidity of other investments. Cashing the CD early results in penalties.
Liquidity. A prudent policy is to make sure money is reasonably available for emergencies. For example, associations that invest in CDs should stagger them so they mature every few months. That way, the association is never more than 90 days from funds it might need for unexpected repairs. If associations need immediate access to funds, some banks will allow borrowing against the CD if the association pays the interest above what the CD is earning.
Jumbo CDs. A jumbo CD is a certificate of deposit in a very large denomination, usually at a minimum of $100,000. Like a traditional CD, a jumbo CD is a low-risk investment, provided the amounts are within FDIC limits. Jumbo CDs typically deliver a higher rate of return than comparable cash investments such as money market accounts or savings accounts.
CDARS Program. For convenience, many associations participate in a program called "Certificate of Deposit Account Registry Service" (CDARS). Boards can deposit amounts that exceed FDIC limits in a single bank and have their funds dispersed into individual CDs up to FDIC limits in member banks across the country. This allows boards to deal with one bank, receive a single statement summarizing all their CDs, and remain fully insured by the FDIC. For more information, check the CDARS website at www.cdars.com.
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