A time deposit or term deposit (also known as a certificate of deposit in the United States, and as a Guaranteed investment certificate in Canada) is a deposit in a financial institution with a specific maturity date or a period to maturity, commonly referred to as its “term”. time-deposits differ from at-call deposits, such as savings or checking accounts, which can be withdrawn at any time, without any notice or penalty. Deposits that require notice of withdrawal to be given are effectively time-deposits, though they do not have a fixed maturity date.
Unlike a certificate of deposit and bonds, a time-deposit is generally not negotiable; it is not transferable by the depositor so depositors need to deal with the financial institution when they need to prematurely cash out of the deposit.
time-deposits enable the ba’nk to invest funds in higher-earning financial products. In some countries, including the United States, time-deposits are not subject to the ba’nks’ reserve requirements, on the basis that the funds cannot be withdrawn at short notice. In some countries, time-deposits are guaranteed by the government or protected by deposit insurance.
Interest on time deposit
Time deposits normally earn interest, which is normally fixed for the duration of the term and payable upon maturity, though some may be paid periodically during the term, especially with longer-term deposits. Generally, the longer the term and the larger the deposit amount the higher the interest rate that will be offered.
The interest paid on a time deposit tends to be higher than on an at-call savings account but tends to be lower than that of riskier products such as stocks or bonds. Some ba’nks offer market-linked time deposit accounts that offer potentially higher returns while guaranteeing principal.
At maturity, the principal can be either paid back to the depositor (usually by a deposit into a ba’nk account designated by the depositor) or rolled over for another term. Interest may be paid into the same account as the principal or to another ba’nk account or rolled over with the principal to the next term.
The money deposited normally can be withdrawn before maturity, but a significant penalty will normally be payable.