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What is time deposit?
What is a time deposit? Time deposit (or also called term money ) is a term deposit that an investor can arrange with a financial institution and provide it with an amount of money. For this purpose, a time deposit account is opened and a contract is concluded with the financial institution. A fixed deposit is agreed for a predetermined period of time. This period is at least one month and can be up to 5 or even 10 years. The most frequent and common periods are 1, 3, 6, 12 or 24 months. During this period of the term of the time deposit, the investor usually cannot dispose of the money. The time deposit is therefore a rather short- to medium-term form of investment.
In addition to the period of the time deposit, the investor and the financial institution agree on a fixed interest rate for the time deposit. Interest is always calculated on a one-year basis (p,a,). This interest rate is based on current market interest rates, which in turn are based in the short-term area on the ECB’s key interest rate for the so-called deposit facility. This key interest rate for deposits with the ECB has been -0.5% p.a. since September 2019. Therefore, the current interest rates for short-term time deposits (up to and including 12 months) are only very slightly above zero percent. At 24 or 36 months, 1% or a little more can currently also be achieved.
A fixed-term deposit is characterized by the fact that both maturity and the interest rate, and thus the return on the investment, are precisely calculable and predictable. The interest is credited to the investor’s current account with the outstanding repayment amount at the end of the term.
Some banks also offer the option of automatic reinvestment of the time deposit, either without the distributed interest or including the distributed interest. In the latter case, the investor benefits in the medium and long term from the compound interest effect, which the longer the investment period, the more it can have a positive impact on the return of the entire investment.
Frequently asked questions: What is fixed-term deposit?
How does a time deposit differ from a call money?
The call money is made available to the financial institution for an indefinite period of time and is available on a daily basis. The investor is much more flexible with the call money than with the time deposit, because he can dispose at any time daily. However, as a rule, the interest rates of the overnight deposit are also lower than those of the time deposit, especially if the time deposit is invested for the medium and long term.
Can a fixed-term deposit also be terminated prematurely?
As a rule, it is not possible to terminate a time deposit before the end of the agreed term. Some banks offer the possibility of early termination in exceptional situations. However, the interest to be paid out is then significantly reduced or even cancelled altogether.
Can a time deposit benefit from rising interest rates?
Per se, a time deposit cannot benefit from rising interest rates or suffer from falling interest rates because the interest rate is fixed during the term. However, with a time deposit strategy, regular liquidity can be generated by investing several time deposits over different maturities, which in turn allows a maturing time deposit to be reinvested at a higher interest rate. In this case, the investor then benefits from rising interest rates with some lag.
Is a fixed deposit guaranteed?
Yes, the time deposit is of course guaranteed by the financial institution. However, if the financial institution runs into payment difficulties, the state deposit insurance scheme takes effect in every EU country (and in Switzerland), which protects investment amounts and cash funds in an account of up to 100,000 euros (or an equivalent amount in foreign currency).
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What are the advantages and disadvantages of time deposits?
D
he advantages of fixed-term deposits are the high degree of security and the precise predictability of repayment and interest income. In addition, a time deposit can also be used for asset accumulation, as it can be arranged with relatively manageable amounts.
The disadvantages of the time deposit are the lack of liquidity during the term and the relatively low interest rate. As interest rates have been extremely low or even negative in recent years, fixed-term deposits have lost much of their importance as a financial investment, and alternative forms of investment have gained in importance. If you would like to receive further information on lucrative investments, please use the contact form to arrange a non-binding consultation with one of our experts.