Super Negotiable Order of Withdrawal Accounts

Scarcely had the federal government authorized banks to offer money market savings accounts than it also granted them permission to introduce checking accounts that pay money market interest rates — accounts known as “Super-NOW’s.”

Depending on the policy of the individual bank, Super-NOW accounts may offer all of the features of regular NOW accounts, including free check-writing privileges and no service fees as long as a minimum balance is maintained. If you are to earn money market rates, you must maintain the legal minimum of $2,500 in your Super-NOW account. If you are to benefit from free check-writing privileges, the bank will generally require you to maintain the same balance as is required for a regular NOW account.

The interest paid on Super-NOW accounts usually varies from day to day, but in general is a point or so below that paid on money market savings accounts. Should a Super-NOW account fall below the $2,500 minimum, most banks will continue to pay interest, though it will be reduced to the rate paid on regular NOW accounts.

While a Super-NOW pays slightly lower interest, its major advantage over a money market savings account is that it offers unlimited checking privileges. One banker has gone so far as to say that with these new high-yield accounts there is no reason for anyone with $2,500 ever to maintain a passbook or an ordinary checking account. Indeed, it is quite possible that the minimum deposit for Super-NOW’s, as well as money market savings accounts, will be reduced in the near future.

Features of Money Market Accounts

Like other bank services, money market savings accounts are subject to government regulations, Individual banks, however, may offer special inducements within prescribed limits. Here is a summary of the main features offered by a typical money market account:

• Minimum investment. To open and maintain a money market savings account, a minimum of $2,500 is legally required, although some banks require a higher initial investment but thereafter sometimes permit the depositor to reduce the account to $2,500. So long as this minimum remains in the account, money market interest rates will be paid. There is usually no charge for servicing the account.

• Interest rates. There is no maximum interest limit and rates can either be linked to some other marketplace factor such as the rates being paid by the federal government on its Treasury bills, or can be set at any other level the institution may choose. New interest rates are generally posted every seven days. Some banks pay investors a bonus for maintaining large deposits, for example, an additional 1 percent interest on accounts of $25,000 or more. However, if the average deposit in any month falls below $2,500, interest rates for that period drop to the rate the bank pays on passbook savings — usually 5 - 5.5 percent. Interest on money market savings accounts is generally compounded daily and paid monthly, and an investor who closes an account before the end of the monthly statement cycle generally loses all interest for that month.

Bank Money Market Accounts

As part of the continuing deregulation of banks to allow them to compete more successfully with other financial institutions, federal authorities in late 1982 authorized them to offer money market rates to their customers. This has brought banks into direct competition with private brokerage houses, for whom these funds have been a primary source of income in a period of high inflation and high interest rates. For consumers, the benefit of such funds in recent years has been the high interest rates they have paid. Although these rates are not guaranteed — they traditionally vary with the rates being paid on such federal securities as Treasury bills — in the early 1980’s their yields were, on the average, significantly higher than yields offered by most other forms of investment.

In the competitive atmosphere of late 1982, when bank money market accounts first became available, both commercial and thrift institutions were offering initial interest rates in excess of the rates offered by brokerage houses — inducements to tempt investors to transfer their funds from the brokerage houses to the banks. The high rates were guaranteed for only a short period, often no more than a week, after which they often dropped into line with the rates offered by the investment concerns.

In one respect, at least, banks have a significant advantage over investment houses in attracting investors to their money market accounts: bank deposits are insured by the federal or state agencies while the investment houses can offer no such guarantee of safety. However, it should be noted that as of mid-1983, no investor had lost a penny through money market funds operated by brokerages.

Reinvesting a Certificate of Deposit

During the life of a certificate of deposit you should discuss with an officer of your bank what you want done with the funds in the account at maturity. If you fail to make provision for taking the cash or reinvesting it, depending on bank policy and the law in your state, one of several things may happen: the cash could be transferred to a passbook account paying lower interest; it could be held by the bank at no interest; it could be reinvested in a new CD for the same time period. Check over your certificates of deposit at regular intervals to remind yourself of their dates of maturity. It is a wise idea to keep a calendar noting their maturity dates a week in advance.

Certificates of Deposit with Fluctuating Rates

Many banks offer special certificates of deposit that pay variable rates of interest. Depending on the bank, they may be called “Premium Rate Certificates” or “Investment Accounts,” or some similar name. Like ordinary CD’s, they are sold for specific lengths of time and interest penalties are exacted for early redemption. However, the interest rates are not fixed but are linked throughout the life of the certificate to some other indicator of the bank’s choosing — the average yield on U.S. Treasury securities, for instance. If that yield rises, so does the interest rate on the certificate; if it falls, the rate of the CD declines as well.

A variable-rate CD is a bit riskier than an ordinary certificate in terms of interest payments, but it does offer the possibility of higher profits if interest rates rise. Like a fixed-rate CD, principal and accumulated interest are guaranteed by the FDIC or FSLIC up to $100,000, or in some states, by a state agency up to an amount determined by state law. Now that banks are permitted to offer money market savings accounts, it is likely that investor interest in fluctuating-rate CD’s will decline. For small investors, however, they offer one major advantage over money market accounts: they usually require a much smaller deposit.

There are many types of certificates of deposit (CD’s), but all share a common characteristic: the money deposited must remain in the account for a specified time, with severe penalties for early withdrawal. On most CD’s the interest remains the same throughout the life of the certificate. By and large, the longer the life of the certificate the higher the interest rate, except, in some cases, very long term certificates. At one time, stringent regulations governed CD’s in denominations less than $100,000, making them somewhat unattractive investments. In recent years, these regulations have been eased, and the purchase of lower priced CD’s has become a desirable investment for many people.

The main advantage of fixed-interest CD’s is that the interest rate is guaranteed for the life of the certificate, whether or not prevailing rates of interest fall. This, of course, can become a disadvantage if general interest rates rise.

The primary drawback of a CD is that your money is tied up for a specified period. If you decide to withdraw your funds from a CD before its maturity, you must first get the bank’s approval and then be prepared to pay a significant penalty. Under current federal rules, early withdrawal penalties for CD’s issued after October 1, 1983 amount to three months’ loss of interest for certificates maturing in more than a year, and 31 days loss of interest for certificates that mature in less than a year. (Penalties are not exacted if a CD is redeemed early because the owner has died or has been declared legally incompetent.)

A CD owner who is pressed for cash may have an alternative to early redemption. Many banks will accept CD’s as collateral for a loan. The rate charged on such a loan, however, may be so high that it is more economical to cash in the CD and accept the penalty. In other instances, it may be worthwhile to take out a loan to avoid the penalty. The determining factor is the length of time for which the loan is needed.

Read about Fluctuating-Rate CD’s and CD Reinvesting in the following posts.

Investment Bank Accounts

In the luxurious world of investments, quite often we hear advises what securities to invest in, but not as often we get advises concerning the types of accounts we should open to start investing. There is a lot of different types of investment accounts, each covering a specific purpose, and new types of accounts are being created to satisfy investors’ demands. What are some of the main types of investment accounts and what purposes they serve to? In the following posts I’m going to review some of the investment accounts that are available currently.

While safety of deposits remains a key element in all types of bank accounts, more and more banks are offering interest rates that match and even exceed those of money market funds promoted by brokerage houses. These high-yield, investment-type accounts have become increasingly available to the average person as the deposit requirements have been lowered during recent years. The primary types are :

• Certificates of Deposit (also called time deposits)
  
• Money Market Savings Accounts
  
• Money Market Checking Accounts, sometimes referred to as “Super-NOW” accounts.