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Term Deposit Definition
A term deposit, also referred to as a time deposit or a certificate of deposit (CD), is an amount of money that is invested into a financial institution for a set amount of time or term period. Interest and withdrawal terms are sometimes negotiable because there are at times penalties with early withdrawals.
Term Deposits Explained
Term deposits are often short-term investments made by individuals into a bank or other financial institution. Because of there short-term nature time deposits are considered to be one of the safest investments in the marketplace. Another advantage for an investor is the ability to invest at a higher interest rate than a normal savings account. Term deposit disadvantages include the fact that a company or individual cannot touch or withdraw the fixed amount until the term is up without suffering a penalty. Smaller denominations under $100,000 usually contain contracts that are pre-established, with a certain amount of penalties if the deposit is withdrawn, interest rates are non-negotiable, and the amount of time in which the individual or company wishes to invest. Larger denominations or deposits above $100,000 are often negotiable. This means that the company or individual will negotiate the penalties for withdrawal, rate at which the money will be invested and the term or time period that the investor wants to pursue in his/her/its investment strategy.
Term Deposit Example
Company X has just received $1 million cash in its receivables from a customer. Company X also owes Company Y $800,000 in accounts payable for supplies that X used to manufacture its products. However,the payables are not due for another 3 months to Y. Therefore X has decided to put the $800,000 aside into a certificate of deposit (CD) for 3 months at a rate 5% which is higher than the savings account rate of 3.5%. Thus by the end of the 3 months X will have a profit of $10,000 (3/12 * 5% * $800,000). By holding the cash owed to Y and investing in a term deposit X has earned an extra $10,000.