A time deposit is a fixed investment with a set withdrawal time limit, commonly known as a Certificate of Deposit (CD), offering higher interest rates than savings accounts. The FDIC insures investments up to $100,000 USD, with CDs available in various maturities and interest rates. Early withdrawals result in penalties, but death or incompetence of the owner allows for penalty-free withdrawal.
A time deposit is a fixed currency investment in a financial institution with a set time limit as to when it can be withdrawn. The term “time deposit” is most often mentioned in Australia, Canada, and New Zealand, while the term “time deposit” is more common in the United States and European countries.
A time deposit investment is an illiquid 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 savings account for liquid (or demand) deposits. These low-risk instruments are very safe and serve as an attractive alternative for the conservative investor.
The most common form of time deposit is a Certificate of Deposit (CD). They generally have expiration dates from 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 investments by banks and savings institutions up to $100,000 United States Dollars (USD), including principal and accrued interest. If the CD were a joint account owned by two people, 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 the 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 less than one year old is generally paid at maturity, and CDs older than one year are generally paid monthly, quarterly, semi-annually, annually, or at maturity.
Interest on time deposits is based on an annual rate vs. compound interest. In an interest-bearing account, interest is at a fixed or variable rate. A fixed rate CD will pay the same interest rate for 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 earn interest, but are issued at a substantial discount and mature at face value.
Jumbo CDs, part of the M3 money supply, are time deposits with investments greater than $100,000 USD. IRAs, self-directed Keogh plans, 401k plans, and certain self-directed defined contribution plans are FDIC-insured up to $250,000, including principal and accrued interest.
With any term deposit, no additional deposits or withdrawals are allowed and early withdrawal will result in penalties. However, even in the event of the death or incompetence of the CD owner, early withdrawal of the entire CD will generally be allowed without penalty.
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