Demand deposit

Written by Fmi.Online Friday January 6, 2023
Demand deposit funds deposited in a bank account at a low or a zero interest rate, which allows depositors to directly withdraw their money and issue bank checks up to the limit of their account balance at any time.

Explanation :

Demand deposits can be on a checking or a savings account, and withdrawals  can be made either from an ATM or from the bank’s cashier. Unlike term deposits, which require a predetermined period to pass by before allowing the depositor to make a withdrawal, demand deposits allow withdraws up to a certain daily limit. Usually, demand deposits make interest  payments on a monthly, bi-annual or annual basis, and are mostly preferred by the banks as they incur the lower costs due to their low-interest rate. In some cases, i.e. capital controls, depositors can withdraw money from their demand deposits up to the specified withdrawal limit imposed by the government. In other cases, demand deposits may allow for an overdraft, and the account is converted into a liquidity account.

Example :

Company ABC is a commercial company that trades aluminum foils. The company keeps its funds in demand deposit accounts in a local bank. When a customer deposits money to any of the company’s accounts, the accountant can withdraw the funds and make timely payments for salaries, wages, and suppliers. Demand deposits have a low interest rate, but the company can withdraw funds whenever they need money to pay for supplies, office expenses, and so on. There are many ways a company can open a demand deposit. They can do so in the name of the company or in the name of its legal representative and the funds deposited can be managed only by the people who are mentioned as beneficiaries in the account. The transfer of funds to the accounts of suppliers can be made through a bank teller, an ATM, via the company debit card, through online banking and/or through a check. In all these cases, the company demands the bank to make a payment equal to the sum of money indicated to the payee identified.

In a nutshell :

  • Demand deposit accounts allow funds to be withdrawn at any time from the financial institution. 
  • Demand deposits provide the money consumers need for cash and for daily expenses and purchases.
  • Demand deposit accounts pay little or no interest—the trade-off for the funds being so readily available.
  • Demand deposit accounts can have joint owners: Either owner may deposit or withdraw funds and sign checks without permission from the other.
  • Demand deposit accounts contrast to time or term deposit accounts, in which the funds are locked up for a certain period, unavailable for access without penalty, if at all.
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