What is a Time Deposit
A time deposit is an interest-bearing bank deposit account that has a specified date of maturity, such as a certificate of deposit (CD). The funds in these accounts must be held for a fixed term and include the understanding that the depositor can make a withdrawal only by giving notice.
BREAKING DOWN Time Deposit
A bank is authorized to require depositors to give 30 days' notice before withdrawing funds from a savings account, which could make them a type of time deposit. However, passbook accounts are typically considered readily available funds and account holders can make withdrawals without giving notice. Certificates of deposit (CD) are issued for a specified term, typically from 30 days (the minimum) up to five years. Although funds can be withdrawn from CDs without notice (on demand), there are penalties for early withdrawal.
Time deposits are lower-risk investment mechanisms that provide a specified interest rate in return for leaving funds deposited for a specified amount of time. Specific conditions surround the ability to withdraw the funds, including the use of penalties when the depositor makes an early withdrawal. It is due to this sacrifice of liquidity that banks offer favorable interest rates compared to most basic savings accounts.
Purpose of Time Deposit Accounts
Time deposit accounts provide banks the funds necessary to lend money to other individuals or entities. The bank makes a profit by lending the money held in the time deposit account to those seeking funds charging a rate higher than that being provided to the time deposit account holder.
Maturity and Interest Rates
Banks and other financial institutions can negotiate any maturity term (the length of the deposit) that a customer requests, as long as the term is a minimum of 30 days and interest is paid. Once maturity is reached, the funds can be withdrawn without penalty, or account can be renewed and held for an additional term. In most cases, the longer the term, the higher the interest rate is. For example, a one-year CD may offer a 1.10% APY, while a five-year CD for the same amount might provide a 1.75% APY. In addition, larger CDs (those with a higher deposit) generally offer more favorable interest rates.