Time Deposit Account or Medium-Term Notes?

Both time deposit accounts and medium-term notes let you earn interest on money you entrust to a bank. This moneyland.ch guide explains the key differences and answers the most important questions.

What is a time deposit account?

A time deposit account – also referred to as a term deposit account or fixed-term deposit - is a kind of bank account. Money that you place in a time deposit account is blocked for a predetermined amount of time (the deposit term). In exchange for the restricted access to your money, you typically earn higher interest than you would with a savings account from the same bank. What is more, the interest rate of a time deposit account remains the same for the entire fixed deposit term. Each bank has its own minimum deposit requirements for time deposits.

What is a medium-term note?

A medium-term note is a kind of bond. Unlike a time deposit account, a medium-term note is not a bank account, but a security. When you buy a medium-term note, you are lending money to the bank for a predetermined length of time (the bond term). The bank pays you interest for the loan – typically at a higher rate than you would earn with a savings account from the same bank. The interest rate of a medium-term note is fixed, and remains the same across the entire bond term. Medium-term notes are typically issued in 1000-franc denominations, so the amount you invest must be a multiple of 1000 francs. Each bank has its own minimum investment requirements for medium-term notes.

What is the difference between a time deposit account and a medium-term note?

For you as the customer, there is very little difference between using a fixed-deposit account and using medium-term notes. In both cases, your money is blocked for the duration of the fixed term, and earns interest at the fixed annual interest rate.

Both of these products are generally only offered in combination with a private account or savings account from the same bank. Both may be offered with investment terms of up to 10 years. Depending on the bank, both medium-term notes and time deposit accounts may be offered in other currencies, such as euros, in addition to Swiss francs. There are also both medium-term note and time deposit account offers for businesses.

Because these products are so similar, they are both included in the same interactive medium-term note and fixed deposit comparison on moneyland.ch. But in spite of their similarities, both of these very similar products have a few unique advantages and disadvantages that can play a role in some cases.

What are the advantages of fixed deposit accounts?

• No custody account is required: Unlike medium-term notes, which are securities that must be held in a custody account, a fixed deposit account does not require custodial services. This can be beneficial if the bank in question charges custody fees for holding medium-term notes. With a fixed deposit account, custody fees are not an issue.
• Shorter investment terms: There are fixed deposit accounts with terms shorter than one year, such as six months or nine months. Medium-term notes, on the other hand, are not offered with terms shorter than one year.
• Possible withdrawals: There are a handful of banks that allow you to withdraw part of the money from your time deposit account, though this generally incurs penalty fees.

What are the disadvantages of fixed deposit accounts?

• Possible account fees: Some banks charge basic, ongoing account fees for fixed deposit accounts. These account fees detract from your returns.
• Not widely offered: Fixed deposit accounts are much less widely offered than medium-term notes. Because only relatively few Swiss banks offer fixed deposit accounts, the selection is small, and the interest rates of the most favorable medium-term notes are often higher. Additionally, the minimum deposit requirements are often high.

What are the advantages of medium-term notes?

• The large selection: Most Swiss banks offer medium-term notes, so the selection is much larger than the range of fixed deposit accounts.
• Low minimum deposits: There are Swiss banks that offer medium term notes with a minimum deposit of just 1000 francs.

What are the disadvantages of medium-term notes?

• A custody account is required: Many banks waive their custody fees for their own medium-term notes. But those that do not typically charge custody fees equal to between 0.05 and 0.20 percent. Those fees detract from your returns.
• No withdrawals: Medium-term notes must be held in full until the bond term expires. There are banks that give you the option of terminating your full investment ahead of schedule, but this incurs high penalty fees.
• Long terms: The minimum bond term for a Swiss medium-term note is one year.

Is there a difference between Swiss bank depositor protection for time deposit accounts and medium-term notes?

No. Both fixed-deposit accounts and medium-term notes are covered by the bank depositor protection scheme, just like private accounts and savings accounts.

Can I withdraw my money before the end of the fixed term?

Most banks do not let you make partial withdrawals from time deposit accounts, and partial withdrawals from medium-term notes are never possible. You also cannot normally withdraw your money in full without closing your account. But there are exceptions to this rule.

Some banks allow you to close and cash out a time deposit account or terminate medium-term notes before the fixed term expires, but charge high penalty fees.

Terminating a time deposit or medium-term note investment early only makes sense if you could earn higher yields elsewhere after accounting for the lost interest and the penalty fees.

When does using time deposit accounts and medium-term notes make sense?

Both time deposit accounts and medium-term notes can be used to provide stability to your investment portfolio. Because they have both a clear, fixed term and a clear, fixed interest rate, you can easily calculate the exact return you will earn on your investment. That is not the case with other interest-yielding investments like savings accounts.

However, you should always be aware that your invested capital will be locked up for the duration of the investment term. Terminating your investment – in order to take advantage of new, higher interest rates, for example – is either not possible, or is only possible if you are willing to accept high penalty fees. As a general rule, time deposit accounts and medium-term notes are only suitable for money that you are sure you will not need until the end of the fixed term.

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