A time deposit is a bank account that pays interest and has a predetermined maturity date. E.g. certificate of deposit (CD). In order to earn the decided interest rate, the money must be kept in the account for the specified amount of time.
A CD or other type of time deposit can be obtained at almost any bank, credit union, or other financial institution. The interest rates paid, as well as other stipulations, differ. One bank, for example, may offer a higher rate of return in exchange for a larger deposit. A CD is a savings account that is opened with the promise that the owner will not touch the funds for a specified period. The period can last anywhere from a few months to several years, generally 3 – 5 years.
A short-term time deposit is one with a period of one year or less. Anything above that qualifies as a long-term investment. Time deposits typically yield a greater interest rate than conventional savings accounts. The larger the interest payment, the longer the period to maturity. Time deposits are also known as term investments.
In a Time Deposit account, a customer can receive a little greater interest rate than with a conventional savings account or an interest-bearing checking account. Because the money is locked in until the account’s maturity date, the higher return is offered. If a time deposit owner needs to withdraw money before maturity, he or she will forfeit some or all the guaranteed interest and may have to pay penalty costs. The terms are spelled out in the fine print provided to the saver when the account is opened.
However, if interest rates rise, investors may miss out on a better opportunity; depositors can’t withdraw their money without penalty; and fixed interest rates don’t always keep up with inflation are some of the drawbacks of time deposits.