A bank is most likely to impose a charge on early withdrawal of funds from a fixed term deposit account in order to:

• A. discourage other fixed-term depositors from attempting to withdraw funds early.
• B. make its advertised fixed term deposit rates look better than they really are.
• C. to encourage more funds to be placed on demand accounts.
• D. reflect the increased cost to the bank of replacing that deposit at a higher deposit rate.

Answer: (D)

When a bank issues a fixed-term deposit, the funds are locked in for the agreed period, and the bank plans its funding and lending around that term. If the depositor withdraws early, the bank may have to replace that money before its maturity, often at a higher cost because it must borrow or attract funds at prevailing, potentially higher, rates. The early withdrawal charge serves to compensate the bank for that increased cost and the liquidity risk created by the unexpected withdrawal. This keeps the bank’s funding costs more stable and aligns depositor behavior with the bank’s funding needs.

Other choices aren’t the primary purpose: penalties aren’t mainly to deter other depositors, to mislead about advertised rates, or to push funds into demand accounts. The core function is to reflect the higher cost of replacing funds if withdrawals occur before term.