The concept of a Certificate of Deposit (CD) is neither unique nor special to banking institutions, however they do pose as a vehicle for a few interesting methods of \"bank investing.\" A CD is a 'time deposit' account at a banking institution (traditional, credit union or internet based) in which the investor guarantees the banks exclusive usage of the funds for a specific amount of time in turn for interest. This interest is usually compounded on a daily basis but credited monthly. Because of this time commitment contract, this rate is usually higher then savings or money market deposit accounts. Interestingly, in times of financial strife, banks may increase the interest rates as an enticement to secure guaranteed assets for their own treasury.

These types of investments are considered in the FDIC insurance of $250,000 per individual per class of ownership. Liquidity becomes the greatest issue with these types of risk-less investments. Because of this 'guarantee' to the bank, early withdrawal will result in penalties. These penalties vary in size - usually being equivalent to three (3) months worth of average accrued interest for CDs with a 12 month or less maturity or six (6) months for those greater than one year. If the withdrawal occurs before enough interest has accrued, the bank may invade the principle.

With these penalties, one may wonder that since the banks frequently change interest rates (in response to the Federal Reserve changing interest rates), could it be investment savvy to accept a penalty in order to reinvest the funds at a higher rate in another CD?

For this to be a consideration, we must make certain assumptions.

• Interest is credited at the conclusion of the day.
• Interest is compounded daily (a norm for most CDs).
• This is a traditional CD, not one in which the rate may be adjusted or funds may be withdrawn upon without penalty.
• Penalties will follow the aforementioned guidelines (average of three months interest for 12 month or less maturity and average six months of interest for greater than 12 month maturity).
• We will assume a 30 day month (360 day year).
• No interest payment will be made in the form of coupons and all interest will be reinvested.

Here are examples of a 1 year and a 5 year CD at average current rates (found at BestCashCow.com). Note that since the bank has a guarantee of your money for a longer duration of time the 5 year rate is much higher than the 1 year.

Initial investment in both: $10,000

CD A - 12 month rate: 1.65 APY (0.0000452 daily rate)

CD B - 60 month rate: 3.15 APY (0.0000862 daily rate)

Total interest for CD A would be ~$164.00 with a monthly average of ~$13.70. (3 month $41.10).

Total interest for CD B would be ~$1679.20 with a monthly average of ~$28.00. (6 month $168.00).

With these figures it must be noted that the penalties are usually an average interest and since this is compounded daily, interest accrued in month one is less than month 2, etc. So, one would lose principle if CD A was redeemed before or at the 3 month mark or CD B before or at the 6 month mark.

Technically it would be possible to absorb the penalty if the APY increased; it would have to increase by over 230 basis points to make up the three month penalty on the 12 month CD at 1.65% in the first month. The APY would have to increase by over 500 basis points on the 5 year CD.

Given that we are in uncharted territory with the Federal interest rate floating between 0% to 0.25%, chances are slim that the interest rates will spike so quickly. If they were to do so, getting back you CD penalty would be the least of your worries. See: Zimbabwe 100 Trillion Dollar Bill. We are not prepared for such inflation/hyper inflation. The best way to leverage the change in CD rates would be to ladder your investments.

First Commons Bank, a new bank located in Newton, MA is offering a 1.5% APY on a 13-month breakable CD. The rate of 1.5% APY is competitive when comparing it to the best cd rates for a 12 month term, although it is near the bottom of the rate table. But what makes the CD attractive is that it offers a one-time withdrawal, penalty free. The best savings and money market rates are currently between 1.5 - 1.8% APY, putting this CD within that range.

The CD requires a minimum deposit of $10,000.

After visiting their website, it quickly became apparant that there is no way to open the CD online. I called and was told that they would be happy to open the CD via phone, fax, or mail. The offer is available nationally. To open via phone call 617-243-4400.

First Commons Bank opened its doors in September 2009. The bank was capitalized by over 300 investors who contributed $18 million. In a short period of time it has attracted 55 MM in assets. It currently has one branch in Newton, MA, an affluent suburb outside of Boston.

The bank is nationally chartered and FDIC insured. Because the bank just began operation, there is no Bauer rating available yet.

Franklin Synergy Bank is offering a 2.10% APY 12-Month CD. That's currently the best 1 year cd rate according to the BestCashCow rate tables. We've had this listed on the rate tables for some time but haven't really called out the offer. The eCD as its called has a minimum investment of $1,000 and a maximum investment of $99,000 for each individual CD. Customers can open multiple CDs up to $500,000 per person.

I called and confirmed that accounts can only be opened online and are available nationally. Once the application is completed, you'll have to print and send back a signature card along with two forms of identification. Funding can be done via check or wire transfer. The rate locks when the application is received and the CD starts the day the funds are received.

Franklin Synergy Bank is a relatively new bank, started in 2007. The bank is located in Franklin, TN. As a result, it does not yet have a Bauer rating, It is FDIC insured. As of Sept 30, 2009, the bank had $237 million in assets, up from $131 million the year before.

Please share any experiences or questions regarding Franklin Synergy Bank below.