Demand Deposit: Identifying the True Statement

A demand deposit is a fundamental concept in banking. It refers to money held in a bank account that can be withdrawn or accessed by the account holder without prior notice, essentially 'on demand'. These accounts are characterized by their high liquidity, meaning the funds are readily available for use.

Analyzing the Options for Demand Deposits

Let's examine each statement to determine which accurately describes a demand deposit:

• Option 1: A type of investment account with high returns

  This statement is incorrect. While some bank accounts offer returns, demand deposits primarily focus on accessibility and safety rather than high returns. Investment accounts designed for high returns typically involve different structures and risk levels, and often restrict immediate access to funds.

• Option 2: A deposit that is only accessible through a bank's ATM

  This statement is incorrect. Demand deposits offer multiple access methods beyond just ATMs. Customers can typically withdraw funds via checks, online transfers, debit cards, and in-person at a bank branch.

• Option 3: A deposit that can be withdrawn on demand

  This statement is true. The defining characteristic of a demand deposit is that the funds can be withdrawn by the account holder at any time, without needing to give the bank advance notice. Checking accounts are the most common example of demand deposits.

• Option 4: A long-term savings account with penalties for early withdrawal

  This statement is incorrect. Demand deposits are the opposite of long-term savings accounts that impose penalties for early withdrawal. Accounts like Certificates of Deposit (CDs) typically have such restrictions, whereas demand deposits prioritize immediate access.

• Option 5: [Option text missing]

  As there is no text provided for Option 5, it cannot be evaluated.

Understanding Demand Deposit Features

Demand deposits offer significant flexibility. Key features include:

• Immediate Accessibility: Funds are available anytime.
• Transaction Convenience: Easily used for payments via checks or debit cards.
• Primary Use: Typically used for daily expenses and transactions rather than long-term savings or investment growth.