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What is a time deposit?
A time deposit is a bank deposit that has a fixed term and interest rate. The funds in this account cannot be withdrawn for a specific term, unless a penalty is paid.
A time deposit, also referred to as term deposit, is an interest-bearing bank account with a fixed term. It allows depositors to grow their money with higher interest rates compared to a regular savings account.
When the term is over, depositors can withdraw their money or it can be renewed and held for another term. While funds can be withdrawn from a time deposit without prior notice, there are typically penalties for early withdrawals. The amount of penalty is subject to the total term of the time deposit and the issuer.
To avoid incurring penalties, depositors have to request and schedule withdrawals well in advance. Typically, the waiting period between a request and the actual implementation of the withdrawal is 30 calendar days.
Banks and other financial institutions use the funds in the time deposit account to provide loans and other financial products to qualified individuals or businesses. Banks make a profit by lending the funds held in the time deposit account at rates higher than that being provided to the holder of the time deposit account.
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Time deposit example
In the U.S., one of the most common examples of time deposit are CDs. For example, Mario Lopez purchases a $5,000 CD at a fixed interest rate of 4 percent, with maturity in three years.
After one year, the amount of his deposit would become $5,200 and the following year, it would increase to $5,408. By the end of the term, the amount of money that Mario can withdraw is $5,624.32.
If Mario decides to withdraw his money before the maturity date, he will incur a penalty. Thus, at the end of the second year, when the amount of the CD will be $5,408, Mario will be charged 3/12 (25 percent) of the annual interest earned. Instead of receiving $5,408 in year two, he will receive $5,356.
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