Bank time deposits (Certificates of deposits) have some of the highest return on investment of government guaranteed investments available today. In gen­eral there are three types of bank deposits: (1) checking accounts, (2) savings accounts and (3) time deposits. All of these accounts have equal standing as obligations of the bank, and almost all (96%) of them are insured up to $10,000 by the Federal Deposit Insurance Corporation. In 28 years there have been 440 commercial bank failures but only one serious savings bank failure. The only real difference between checking and savings accounts on the one hand and time deposits on the other, is that the former can be drawn out immediately and the latter are deposits for a period of time—generally three, six, nine or twelve months. For the average small or medium size investor this difference is not significant. He builds up his account through savings and he draws out only in emergencies and to make an important purchase, such as a car or a home.

The rate of interest you receive on bank time deposits is presently between 4.7% per annum and 6% for return on investment. Banks pay you up to 3% on time deposits, sometimes less.* How then is the rate of 4.7% to 6% possible?

* A typical rate structure is 2% on deposits left in the bank from 30 to 89 days, 2½% on deposits from 90 days to six months and 3% on deposits over six months.

When business organizations borrow from banks they are usually required to keep deposits in the bank. It is paradoxical but true that if a corporation borrows $100,000 from a bank at say 6% per year, it is expected to keep on de­posit 20% of the loan—in this case $20,000. If the bank makes this requirement, and it usually does, the 6% interest on $100,000 ($6,000) is really $6,000 interest on $80,000 actually available to the corporation to use in its business. Six thou­sand dollars on $80,000 is the real interest rate paid by the corporation—7.5%. The 20% "compensating balance" is a device used by banks to raise the interest rate charged to businesses while giving the semblance of a low interest rate. Sometimes the business organization is paid interest by the bank up to 3% on the compensating balance, sometimes not.

It is obviously to the interest of corporations to use this money in their busi­ness. Otherwise they would not borrow from the banks. You, as the investor, can sometimes make a time deposit by saying to a corporation, "I will put in your 20% compensating balance (or a part of it) so that you can use your money in your business. I will, of course, agree to keep my money on deposit for a period of time. Otherwise if I draw it out the bank will require you to put back your 20% compensating balance. Now, since the bank pays me 3% on these time de­posits you pay me another 2%. Isn't that good return on investment?"

In some cases the bank pays less than 3% on time deposits, so the corporation has to pay more to make up the 5% that you, the investor, want.

Finding these corporations that borrow from banks and would like to use their compensating balances in their business, and handling depositors' funds, consolidating them, paying them back to the investors, collecting interest from the corporation to pay the depositors and renewing deposits is a real job. The organization performing this function gets a fee for this service which ultimately is reflected in the rate charged the corporation for the use of the deposits. For this reason the return to the investor is (1962) sometimes only 4.7%. Since this type investment is absolutely safe and is federally insured up to $10,000, the supply of money going into time deposits can be expected to grow with a re­sulting drop in rates.

In practice the "time" element of the deposit is no handicap to you as far as return on investment is concerned. Your own bank will lend you up to 90% or even 100% of your deposit at relatively low rates should you need funds in a hurry. An additional favorable feature of time de­posits is the fact that while the bank pays its portion of the interest on the in­terest dates (usually semiannually), the corporation often pays its entire portion in advance—when you make your deposit. Where the bank pays no interest on time deposits, the corporation has to pay all the interest and usually pays it all at the time you deposit. When you deposit $10,000 for 12 months, risk free, and immediately get an interest check for $500, the investment is a good one.

One organization which will place your funds in time deposits is:

Greater Miami Savings Center, 174 East Flagler Street, Miami 32, Florida. Besides these sources of investment in bank time deposits, you might visit the banks in your city and ask your banker if he would care to arrange a com­pensating balance for you with some business organization or whether he could tell you what business organizations have loans with compensating balances at the bank who might be receptive to such a plan. The total rate to the corporation (what it pays you plus what it foregoes in interest paid it by the bank on com­pensating balances) should equal the bank's rate charged the corporation. For instance, if the corporation borrows from the bank at 6% and gets 3% on its compensating balance, you can get 3% from the corporation and 3% from the bank return on investment. The corporation loses the 3% interest it receives from the bank on the compensating balance when it withdraws that balance from the bank and puts it to use in the business. Sometimes the bank pays the corporation nothing on its balances. In pure savings accounts New York Banks are paying as high a rate as any in the country (1962). A typical plan is to pay 3¾%interest per year, to which ¼%is added if funds are left on deposit for a year or longer. In Massachu­setts at least 27 savings banks pay 4% interest.