A fixed term is any type of debt instrument that is structured to include a specific time period that must pass before the investment reaches full maturity. During that period, the investor does not have access to the funds invested in the venture, although he or she may receive some sort of interest payment or dividend at specified times during the life of the investment. The principal or initial investment is recouped only when the maturity date is reached and the debt instrument is repurchased by the issuer.
One of the best examples of a fixed term investment is the bond. While there are several different ways to structure a bond issue, just about all types of bonds carry a maturity date. Assuming that the investor chooses to hold onto the bond all the way to maturity, he or she recovers the full amount originally invested in the bond, plus any other compensation that was promised in return for purchasing the bond issue. This often includes interest that accumulates over the life of the bond and is paid at the point of maturity, or interest that is periodically paid at specific points during the bond’s life.
Another example of a fixed term investment is known as a term deposit. Here, an investor deposits funds into an account that is maintained by a specific financial institution. In return for receiving an equitable rate of interest on the funds deposited, the investor agrees to not withdraw the funds until after the date specified by the provisions related to the account. Some fixed term accounts are structured to allow investors to withdraw funds prior to the maturity date, but invoke severe withdrawal penalties if the investor chooses to make a withdrawal. Generally, a fixed term deposit will pay a higher rate of interest than a demand deposit, in which the investor is free to withdraw funds at any time but earns a lower rate of interest.
Any investment that carries a fixed term is likely to pay a higher return than similar investments that allow withdrawal at any time. The higher return helps to offset the inconvenience that the investor may encounter as a result of not being able to withdraw funds until the redemption date arrives. At the same time, the terms related to a fixed term investment help to ensure the issuer of the security that he or she will have use of those invested funds until the debt instrument reaches maturity.