Define Call Deposit Account:

"Call deposit accounts are suitable for individuals and businesses that want to keep their funds liquid and readily available for short-term needs or emergencies."

Explain Call Deposit Account:

Introduction

A call deposit account is a type of bank account that allows depositors to access their funds on-demand or "on call." It is a flexible and liquid account that provides depositors with easy access to their money without facing penalties or waiting periods for withdrawals. Call deposit accounts are also commonly known as demand deposit accounts or call accounts.

Key features of a call deposit account:

1. On-Demand Access: Call deposit accounts offer instant access to funds, allowing depositors to withdraw money whenever they need it without any prior notice. Depositors can make withdrawals at any time, typically through various banking channels such as ATMs, online banking, or visiting a branch.

2. No Fixed Maturity Date: Unlike term deposits or fixed deposit accounts, call deposit accounts do not have a fixed maturity date. The funds in a call deposit account remain available for withdrawal indefinitely, as long as the account is active.

3. Interest Rate: Call deposit accounts may offer interest on the deposited funds, but the interest rate tends to be lower compared to other types of accounts with longer-term commitments. The interest rates are typically variable and may fluctuate based on market conditions and the policies of the financial institution.

4. No Penalty for Withdrawals: Call deposit accounts do not impose penalties or charges for withdrawing funds, as long as the withdrawals are within the available account balance.

5. Safety: Like other bank deposit accounts, call deposit accounts are usually insured by government deposit insurance schemes up to a certain limit, providing a level of protection for depositors' funds in case the bank encounters financial difficulties.

6. Typically Non-Transactional: While call deposit accounts offer easy access to funds, they are generally not used for everyday transactions like payments and bill payments. For that purpose, depositors usually use checking accounts or current accounts.

Example

ABC Company is a small business that generates surplus cash from its operations. The company wants to keep these funds safe, liquid, and easily accessible for short-term needs and opportunities, such as covering unexpected expenses or taking advantage of investment opportunities.

ABC Company opens a call deposit account with its local bank. The bank offers a call deposit account with the following features:

• Interest Rate: 1.5% per annum (variable, subject to change)
• Minimum Opening Deposit: $10,000
• No Fixed Maturity Date
• No Penalty for Withdrawals
• Online and in-branch access for withdrawals

Scenario:

1. Initial Deposit: ABC Company deposits $50,000 into the call deposit account as its initial opening deposit.

2. Interest Earned: Over the course of a year, assuming the interest rate remains constant at 1.5% per annum, ABC Company would earn interest on its deposited amount:

   Interest earned = $50,000 x 1.5% = $750

3. Withdrawals: Throughout the year, ABC Company has various short-term needs and opportunities. It withdraws funds from the call deposit account three times for the following amounts:

   • Withdrawal 1: $15,000 (to cover unexpected repair expenses)
   • Withdrawal 2: $5,000 (to take advantage of a time-sensitive investment opportunity)
   • Withdrawal 3: $7,500 (to pay for inventory purchases)

4. Remaining Balance: After the three withdrawals, ABC Company has the following balance in the call deposit account:

   Remaining balance = $50,000 - $15,000 - $5,000 - $7,500 = $22,500

5. Flexibility: The call deposit account allowed ABC Company to access its funds as needed without incurring any penalties or restrictions. The company had the flexibility to withdraw funds promptly to address its short-term financial requirements.

6. Interest on Remaining Balance: ABC Company continues to earn interest on the remaining balance of $22,500 for the remainder of the year:

   Interest earned on remaining balance = $22,500 x 1.5% = $337.50

7. Total Interest Earned: The total interest earned by ABC Company over the year is the sum of the interest earned on the initial deposit and the interest earned on the remaining balance after withdrawals:

   Total interest earned = $750 + $337.50 = $1,087.50

At the end of the year, ABC Company has $22,500 remaining in its call deposit account, which is readily available for future use. The total interest earned on the account over the year amounts to $1,087.50.

Conclusion

Call deposit accounts are suitable for individuals and businesses that want to keep their funds liquid and readily available for short-term needs or emergencies. They offer the convenience of easy access to funds while still earning some interest on the deposited amount.

However, due to their liquidity and convenience, the interest rates on call deposit accounts are usually lower compared to accounts with longer-term commitments, such as fixed deposits or certificates of deposit (CDs).