Bank products

While banks are part of the financial system, many bank products aren’t considered securities, so they aren’t heavily tested on the Series 6 exam. A few bank products do overlap with securities concepts, though. You’ll want to know the basics of these products and how they can be used as investments.

Certificates of deposit (CDs) are similar to bonds, but they’re issued only by banks. A CD pays a fixed rate of interest on the principal you deposit (similar to a bond’s par value). The bank holds your deposit for a set period, pays interest during that time, and then returns the principal at maturity.

Jumbo CDs, also called negotiable CDs, are large-denomination CDs that can trade in the secondary market. They have a minimum denomination of $100,000, and denominations of $1 million or more are common. Because many retail investors can’t meet these minimums, financial institutions often buy jumbo CDs and repackage them into smaller products for retail customers. Banks typically offer higher rates on jumbo CDs than on traditional CDs because of the larger minimum investment.

Jumbo CDs are usually short-term, with many maturing within one year or less from issuance. Some mature in as little as a week. This short-term structure makes them useful for institutions that want to park large amounts of cash for brief periods. Typical institutional buyers include pension plans, mutual funds, and large corporations.

Like other bank products, jumbo CDs may be covered by FDIC insurance. FDIC insurance protects depositors against loss of funds due to bank failure. Without FDIC insurance, depositors could lose money if a bank went bankrupt. FDIC insurance is government-mandated coverage that banks pay for, and it protects customer deposits up to $250,000 per bank.

Jumbo CDs issued in denominations less than $250,000 have full FDIC coverage. Denominations above $250,000 are only partially covered.

Investors can also buy brokered CDs through brokerage firms. Instead of going directly to a bank, firms such as broker-dealers purchase large quantities of CDs and then resell them to customers. Because the broker-dealer buys in bulk, it can often offer higher yields than a customer might receive by going directly to the bank. Brokered CDs come with a wide range of maturities, from as short as one month to as long as 30 years. Like jumbo CDs, brokered CDs are negotiable and can be traded in the secondary market before maturity.

As long as the CD is titled in the customer’s name (which occurs upon purchase), the investor receives FDIC insurance up to $250,000 per bank. One advantage of brokered CDs is that they can help an investor spread deposits across multiple banks to increase total FDIC coverage. For example, to obtain $1 million of FDIC insurance, an investor could buy four $250,000 CDs from four different banks. As long as the investor stays at or below $250,000 per bank, the deposits are fully insured.

Because CDs generally expose investors to relatively low risk, they typically offer relatively low yields compared with other debt securities. They’re most suitable for investors who want a safe place to hold cash.