diff --git a/jupyter_server/terminal/__init__.py b/jupyter_server/terminal/__init__.py
index c20001c894..d23c036375 100644
--- a/jupyter_server/terminal/__init__.py
+++ b/jupyter_server/terminal/__init__.py
@@ -3,8 +3,8 @@
 import terminado
 from ..utils import check_version
 
-if not check_version(terminado.__version__, '0.8.1'):
-    raise ImportError("terminado >= 0.8.1 required, found %s" % terminado.__version__)
+if not check_version(terminado.__version__, '0.8.3'):
+    raise ImportError("terminado >= 0.8.3 required, found %s" % terminado.__version__)
 
 from ipython_genutils.py3compat import which
 from terminado import NamedTermManager
diff --git a/jupyter_server/terminal/api_handlers.py b/jupyter_server/terminal/api_handlers.py
index 30d13002ff..3967692092 100644
--- a/jupyter_server/terminal/api_handlers.py
+++ b/jupyter_server/terminal/api_handlers.py
@@ -21,7 +21,9 @@ def get(self):
     @web.authenticated
     def post(self):
         """POST /terminals creates a new terminal and redirects to it"""
-        name, _ = self.terminal_manager.new_named_terminal()
+        data = self.get_json_body() or {}
+
+        name, _ = self.terminal_manager.new_named_terminal(**data)
         self.finish(json.dumps({'name': name}))
 
         # Increase the metric by one because a new terminal was created
diff --git a/setup.py b/setup.py
index ab25ebd63f..c2a4ca58d2 100755
--- a/setup.py
+++ b/setup.py
@@ -92,7 +92,7 @@
         'nbconvert',
         'ipykernel', # bless IPython kernel for now
         'Send2Trash',
-        'terminado>=0.8.1',
+        'terminado>=0.8.3',
         'prometheus_client',
         "pywin32>=1.0 ; sys_platform == 'win32'"
     ],
diff --git a/tests/conftest.py b/tests/conftest.py
index 9d694425b2..6369f8eac3 100644
--- a/tests/conftest.py
+++ b/tests/conftest.py
@@ -1 +1 @@
-pytest_plugins = ['pytest_jupyter_server']
\ No newline at end of file
+pytest_plugins = ['pytest_jupyter_server']
diff --git a/tests/test_terminal.py b/tests/test_terminal.py
new file mode 100644
index 0000000000..51a6454562
--- /dev/null
+++ b/tests/test_terminal.py
@@ -0,0 +1,95 @@
+# Only Run tests on MacOS and Linux
+import shutil
+import pytest
+import json
+import asyncio
+import sys
+
+# Skip this whole module on Windows. The terminal API leads
+# to timeouts on Windows CI.
+if sys.platform.startswith('win'):
+    pytest.skip("Terminal API tests time out on Windows.", allow_module_level=True)
+
+
+@pytest.fixture
+def terminal_path(tmp_path):
+    subdir = tmp_path.joinpath('terminal_path')
+    subdir.mkdir()
+
+    yield subdir
+
+    shutil.rmtree(str(subdir), ignore_errors=True)
+
+
+async def test_terminal_create(fetch):
+    await fetch(
+        'api', 'terminals',
+        method='POST',
+        allow_nonstandard_methods=True,
+    )
+
+    resp_list = await fetch(
+        'api', 'terminals',
+        method='GET',
+        allow_nonstandard_methods=True,
+    )
+
+    data = json.loads(resp_list.body.decode())
+
+    assert len(data) == 1
+
+
+async def test_terminal_create_with_kwargs(fetch, ws_fetch, terminal_path):
+    resp_create = await fetch(
+        'api', 'terminals',
+        method='POST',
+        body=json.dumps({'cwd': str(terminal_path)}),
+        allow_nonstandard_methods=True,
+    )
+
+    data = json.loads(resp_create.body.decode())
+    term_name = data['name']
+
+    resp_get = await fetch(
+        'api', 'terminals', term_name,
+        method='GET',
+        allow_nonstandard_methods=True,
+    )
+
+    data = json.loads(resp_get.body.decode())
+
+    assert data['name'] == term_name
+
+
+async def test_terminal_create_with_cwd(fetch, ws_fetch, terminal_path):
+    resp = await fetch(
+        'api', 'terminals',
+        method='POST',
+        body=json.dumps({'cwd': str(terminal_path)}),
+        allow_nonstandard_methods=True,
+    )
+
+    data = json.loads(resp.body.decode())
+    term_name = data['name']
+
+    ws = await ws_fetch(
+        'terminals', 'websocket', term_name
+    )
+
+    ws.write_message(json.dumps(['stdin', 'pwd\r\n']))
+
+    message_stdout = ''
+    while True:
+        try:
+            message = await asyncio.wait_for(ws.read_message(), timeout=1.0)
+        except asyncio.TimeoutError:
+            break
+
+        message = json.loads(message)
+
+        if message[0] == 'stdout':
+            message_stdout += message[1]
+
+    ws.close()
+
+    assert str(terminal_path) in message_stdout