Certifitcates of deposit For The High Yield Investor

by David Jenyns on February 20, 2008

In general there are three types of bank deposits: checking accounts, savings accounts and certificates of deposits. The rate of interest you receive on certifitcates of deposit is presently between 4.7 percent per annum and 6 percent. Banks pay you up to 3 percent on certifitcate of deposits, sometimes less.* How then is the rate of 4.7 percent to 6 percent possible?

* A typical rate structure is 2 percent on deposits left in the bank from 30 to 89 days, 2.5 percent on deposits from 90 days to six months and 3 percent on deposits over six months.

When business organizations borrow from banks they are usually required to keep deposits in the bank. Six thousand dollars on $80,000 is the real interest rate paid by the corporation—7.5 percent. Sometimes the business organization is paid interest by the bank up to 3 percent on the compensating balance, sometimes not.

Now, since the bank pays me 3 percent on these certificates deposits you pay me another 2 percent. In some cases the bank pays less than 3 percent on certifitcate of deposits, so the corporation has to pay more to make up the 5 percent that you, the investor, want.

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