Certificates of Deposit

Lesson

CDs are time deposits issued by banks and other financial institutions, which pay a fixed interest rate over a specified term. They are considered low-risk investments and are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to certain limits.

Practice Question #1

Which of the following is NOT a characteristic of a Certificate of Deposit (CD)?

A) Fixed interest rate

B) Insured by the FDIC or NCUA

C) Unlimited withdrawals without penalty

D) Maturity date

Select an option above to see an explanation here.

A) CDs have a fixed interest rate that remains constant over the investment term. B) the FDIC or NCUA insures CDs up to certain limits. C) CDs have withdrawal restrictions and may charge an early withdrawal penalty. D) CDs have a specified maturity date when the principal becomes due and payable.

Terms

Certificate of Deposit (CD):: A time deposit issued by a bank or financial institution that pays a fixed interest rate over a specified term.
Time Deposit:: A deposit in a financial institution that cannot be withdrawn before a specified maturity date.
FDIC:: Federal Deposit Insurance Corporation, a government agency insures bank deposits up to certain limits.

Practice Question #2

What is the primary difference between a savings account and a Certificate of Deposit (CD)?

A) Savings accounts have a higher interest rate than CDs.

B) CDs have a fixed maturity date, while savings accounts do not.

C) CDs are not insured by the FDIC or NCUA.

D) Savings accounts have early withdrawal penalties.

Select an option above to see an explanation here.

A) CDs typically have a higher interest rate than savings accounts. B) CDs have a fixed maturity date, while savings accounts allow withdrawals at anytime. C) CDs are insured by the FDIC or NCUA, like savings accounts. D) Savings accounts do not have early withdrawal penalties, while CDs may charge a penalty for early withdrawal.

Do Not Confuse With

Savings Account:: A deposit account that earns interest and allows for withdrawals but typically has a lower interest rate than a CD.
Treasury Bills:: Short-term government securities considered low-risk investments but not insured deposits.

Practice Question #3

Which of the following investments is NOT an insured deposit?

A) Certificate of Deposit (CD)

B) Savings account

C) Money market account

D) Treasury bill

Select an option above to see an explanation here.

A) CDs are insured deposits issued by banks and financial institutions. B) Savings accounts are insured deposits held at banks and credit unions. C) Money market accounts are insured deposits that offer higher interest rates than savings accounts. D) Treasury bills are short-term government securities and are not insured deposits.

Historical Example

In the early 1980s, interest rates were at record highs, and banks offered CDs with interest rates as high as 18%. Many investors flocked to CDs as a safe investment option with high returns. However, as interest rates declined over the years, the returns on CDs also decreased, making them less attractive to investors seeking higher yields.

Practice Question #4

Become a Pro Member to see more questions

Example Series 65 Example Practice Question

Real-World Example

A retiree looking for a safe investment option may invest in a 5-year CD with a fixed interest rate of 2%. This gives the investor a guaranteed return on their investment and the peace of mind of knowing that the FDIC or NCUA insures their principal.