What Is A Liquid CD And How Does It Work?

There are innumerable types of certificates of deposit. Based on ones requirements one can decide on a particular type of CD considering  the return options ,relative risks involved and the quantity of principle investment. Traditional CD’s offer returns on the maturation of the CD. The investment is not liquid and the investor does not have the discretion to terminate the CD before maturation Without incurring hefty penalties. The liquid CD has a provision for precisely this reason. It works on similar lines of a traditional CD but provides the investor with some access to his money.

Characteristics

Liquid CD’s have a short maturity period in comparison to a traditional CD. The rate of interest is pre determined. On maturation the investor is provided with a window period. Before the lapse of this period the investor is given an option to cash in his CD or else it would be reinvested into a new CD. This provides a leeway for the investor to make a decision on the future of his CD. However providing this autonomy has a slight down side as the interest rates are considerably low as compared to a traditional CD.

The terms and conditions of a liquid CD are stated by the bank and they vary from one to another. Usually The minimum investment for this type of CD is 5000$. The investor can withdraw sums of money not exceeding 500$ at a weekly interval at the same time he can also deposit additional amounts. The withdrawal or deposits must be made in person. The interest rates are fixed. The investor is susceptible to penalties if he exceeds the withdrawal limit.

Advantages

Liquid CD’s are FDCI approved up to a legal maximum principle. They cannot be opened in connection with the IRA. The risk involved is extremely minimal. This is relatively advantageous to investors with a variable source of income who have access to their money in case of unexpected circumstances .They offer higher rates of interest in comparison to saving accounts. Considering a traditional CD the money is locked and cannot be liquidated until maturity even in cases where the interest rates have soar. This puts the investor at loss. The banks or the brokerage firms are a slight advantage. In a liquid CD even though the interest rates are fixed in case of a rise of the interest rates due to the boom at the stock market the investor has the authority to withdraw the CD and re- invest in a scheme which is more profitable to him.