Certificate of Deposit

Archive for June, 2010

Question: What is the liquidity of the following assets?

List them in decreasing order. (Most liquid to least liquid)

a) gold bars, b) A portfolio of diversified stocks c) checking account d) a house e) Certificate Of Deposit f) savings account.

If you think any assets are equal liquidity, please explain why.
Which of the about would be the WORST store of value? Why?

Answer: Liquidity is the ability to turn an asset into cash quickly and cheaply see the link below for a definition. So the most liquid asset on your list is 1) a checking account, followed by 2) a savings account, 3) a Certificate Of Deposit, 4) a portfolio of stocks, 5) gold bars, and lastly, 6) a house. Reasons: 1) a checking account can be used like cash at most stores with proper id and cashed at a large number of locations including ATMs; 2) a savings account can be immediately accessed by going to the bank that holds the account when they are open or via an ATM; 3) a CD is like a bank account, but involves penalties and cannot be accessed by ATM; 4) a stock portfolio can be sold within minutes but you will pay a commission, normally a fraction of 1%, and access to the cash usually involves a wire transfer or even slower transfer of funds; 5) selling gold bars is a very specialized transaction with a limited number of buyers and implies physical transfer of the assets, which takes time and a commission or discount of several percent for the buyers; and 6) selling a house is not a fast process; even if a willing buyer is standing in front of you (in reality this part of the process by itself takes several months) and closing escrow on a real estate deal is a long process, which normally takes 60 to 90 days as well as a 6% commission for the realtor plus other selling costs.

“Store of value” is not really the same as “liquidity”. If you equate the two, then a house is the worst store of value.

slipknot – i am hated

Question: Is interest income from Fixed Deposit or Certificate Of Deposit (CD) taxable or tax-exempted in your country?

Is interest income from Fixed Deposit or Certificate Of Deposit (CD) taxable or tax-exempted in your country?

Answer Yes/No with your country name. Thank you.

Answer: In the US, it depends. You can get fixed deposits or CD’s that are from municipal bond issues – if federal, they are federally tax exempt but may be taxable in your state. If state or local municipality, they are exempt from that state and local municipality. If the deposit is not backed by a bond issue, then it is taxable in the year that interest income is received, not earned.