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What is a Term Deposit?

KD Morgan
KD Morgan

A term deposit is a fixed investment of currency into a financial institution with a set time limit as to when it can be withdrawn. “Term deposit” is referenced more frequently in Australia, Canada and New Zealand, while the term “time deposit” is more common in the United States and European countries.

A term deposit investment is a non-liquid savings product with a short-term maturity date, ranging from a few months to a few years. Because of this fixed term, the financial institution will pay a higher interest rate than a liquid (or demand) deposit savings account. These low-risk instruments are very safe and serve as an appealing alternative for the conservative investor.

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The most common form of term deposit is a Certificate of Deposit (CD). They generally have maturity dates of 1 month to 5 years. CDs are part of the M2 money supply and are issued as part of the primary market (new issue) or secondary market (issues sold to another party).

In the United States, the Federal Deposit Insurance Corporation (FDIC) will insure bank and savings institution investments for up to $100,000 US dollars (USD), including principal and accrued interest. If the CD were a joint account owned by two persons, it would be eligible for insurance coverage of up to $200,000 USD ($100,000 USD each). Each CD constitutes an obligation between the insurer or secondary market and not the financial institution itself.

CDs are available in a wide range of maturities with minimum denominations and increments of $1,000 USD. Higher interest rates can be secured by investing for a longer period for your term deposit. Interest on CDs of less than one year generally pay at maturity and those longer than a year are either paid monthly, quarterly, semi-annually, annually or at maturity.

Interest on term deposits is based on an annual rate vs. compound interest. On an interest bearing account, interest is either at a fixed rate or at a variable rate. A fixed rate CD will pay the same interest rate throughout the life of the CD. The interest rate on a variable CD may increase or decrease from the initial rate. Zero-coupon CDs do not bear interest, but rather are issued at a substantial discount and mature at the par value.

Jumbo CDs, which are part of the M3 money supply, are term deposits with investments over $100,000 USD. IRAs, self-directed Keogh Plans, 401k Plans and certain self-directed defined contribution plans are FDIC insured up to $250,000 USD, including principal and accrued interest.

With any term deposit, no additional deposits or withdrawals are permitted and early withdrawal will result in penalties. However, in the even of death or incompetence of the owner of the CD, early withdrawal of the entire CD will generally be permitted without penalty.

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