Fixed Term
What is Fixed Term?
Fixed term portrays an investment vehicle, generally some sort of debt instrument, that makes some fixed memories period of investment. With a fixed-term investment, the investor parts with their money for a predefined period of time and is repaid their principal investment just toward the finish of the investment period. At times, even however a fixed term is stated on the investment, the investor or issuer might not need to focus on it.
Grasping Fixed Term
A common illustration of a fixed-term investment is a term deposit in which the investor deposits their funds with a financial institution for a predetermined period of time and can't pull out the funds for the rest of the time span, or possibly not without facing a early withdrawal penalty. The investor, generally, is committed to the fixed term of this financial instrument.
When a term deposit reaches or approaches maturity, the investor must inform their financial institution to either re-put the money into one more fixed term investment or deposit the cash proceeds into their account. In the event that the financial institution isn't given any form of warning, proceeds from the mature term deposit automatically turns itself over to another term deposit with a similar fixed term as before. The interest rate might possibly be lower than the previous rate given that each new deposit is set at the current rate. A term deposit is something contrary to a demand deposit, in which the investor is free to pull out their funds whenever. As a price for the convenience of withdrawal whenever, demand deposits generally pay lower interest rates than term deposits.
Fixed Terms and Debt Instruments
Fixed terms likewise apply to debt instruments, for example, debentures and bonds. These securities are issued with a fixed term that might be short-, intermediate-, or long-term. The fixed term or time to maturity is stated in a bond indenture at the hour of issuance. Dissimilar to term deposits, bonds can be sold before they mature. At the end of the day, investors are not committed to the fixed term of the security.
Issuers can likewise retire a bond before it matures on the off chance that the bond has a embedded call option. The trust indenture indicates the term a bond can be fixed for before an issuer recovers it from bondholders. Callable bond issuers are not committed to the fixed term of the bond.
Instances of Fixed Terms
Expect a bond is issued with 20 years to maturity. An investor can hold the bond for a considerable length of time or can sell the bond before its term lapses. The bond will keep on being traded in the secondary markets until it matures, at which point it will be retired.
Expect one more case in which a bond's fixed term is 20 years and the call protection period might be seven years. All in all, the fixed term of the call protection is seven years and investors are guaranteed periodic interest payments on the bond for a long time. When the call protection term passes, the issuer can decide to buy back its bonds from the market no matter what the 20-year overall fixed term.
Features
- Fixed term alludes to a financial instrument wherein an investor's funds are locked for a predetermined period of time. Investors are paid back their principal toward the finish of that period.
- Contingent upon the type of instrument, investors might possibly have the option to pull out their funds. In the two cases, be that as it may, they can do so solely after a predetermined period.
- Instances of fixed terms incorporate term deposits and bonds.
