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Which of the following describe a time deposit?

Multiple select question.

A person can "cash in" a time deposit at any time without penalty.

Financial institutions pay lower interest rates on time deposits than on MMDAs.

Financial institutions pay higher interest rates on time deposits than on MMDAs.

A person will be severely penalized for withdrawing a time deposit prior to the withdrawal limitation date

1 answer

To determine which statements describe a time deposit, let's evaluate each option:

  1. A person can "cash in" a time deposit at any time without penalty.

    • False. Time deposits typically have a fixed term during which funds must remain invested. Withdrawing funds before the maturity date usually incurs a penalty.

  2. Financial institutions pay lower interest rates on time deposits than on MMDAs.

    • False. Time deposits generally offer higher interest rates compared to Money Market Deposit Accounts (MMDAs), especially for longer terms.

  3. Financial institutions pay higher interest rates on time deposits than on MMDAs.

    • True. Time deposits usually provide higher interest rates than MMDAs due to their fixed term commitment.

  4. A person will be severely penalized for withdrawing a time deposit prior to the withdrawal limitation date.

    • True. Withdrawing from a time deposit before its maturity can result in substantial penalties, depending on the institution's terms.

In summary, the correct descriptions of a time deposit are:

  • Financial institutions pay higher interest rates on time deposits than on MMDAs.
  • A person will be severely penalized for withdrawing a time deposit prior to the withdrawal limitation date.