Term Deposit
Definition
A term deposit is a type of bank deposit that is held for a specific period during which the depositor cannot access the funds without incurring a penalty.
Detailed Explanation
Term deposits are fixed-term investments held at financial institutions that offer a guaranteed interest rate over a specified period. This financial product is popular among individuals who seek a low-risk, short-term investment. The principal advantage of a term deposit is the security it offers, as it typically provides higher interest rates than regular savings accounts and the rate remains fixed throughout the term, making it immune to fluctuations in the broader financial market.
Term deposits come with varying durations, ranging from a few months to several years, and generally, the longer the term, the higher the interest rate. Upon maturity, the depositor can choose to withdraw the funds along with the accrued interest or roll over the deposit into a new term. Early withdrawal of funds from a term deposit usually results in penalties, which can include forfeiting some or all of the interest earned.
Example
Emily invests $10,000 in a 12-month term deposit with an annual interest rate of 3%. At the end of the year, her investment matures, and she receives her initial deposit plus the interest earned, totaling $10,300. She can either take the money or reinvest it in another term deposit.
Key Articles Related To Term Deposits
Related Terms
Certificate of Deposit (CD): A time-bound deposit offered by banks that locks funds for a fixed period and offers a rate of interest that is generally higher than a savings account.
Interest Rate: The percentage at which interest is paid by a financial institution for the use of money deposited with them.
Maturity: The expiration of a financial instrument’s term, at which point the principal is returned to the investor.
Penalty: A financial charge imposed for early withdrawal of funds from a financial product like a term deposit.
FAQs
How is the interest on a term deposit paid?
Interest on term deposits can be paid at maturity, annually, quarterly, or monthly, depending on the terms set by the financial institution.
Can I add money to a term deposit during its term?
No, you cannot add funds to an existing term deposit. Once established, the deposit amount remains fixed until maturity.
What happens if I need to withdraw my money early from a term deposit?
Early withdrawal from a term deposit generally results in a penalty, which can reduce the interest earned or even affect the principal amount, depending on the bank’s terms.
Editor: Colin Graves