A certificate of deposit pays a higher interest rate than a savings account because the money is:

• A. insured for a higher amount by the FDIC
• B. invested in riskier assets by the bank
• C. subject to daily compounding interest
• D. locked in for a fixed period and cannot be withdrawn without penalty

Answer: (D)

Verified step by step guidance

1. Understand the concept of a certificate of deposit (CD): A CD is a financial product offered by banks that provides a fixed interest rate in exchange for keeping the money deposited for a specified period.
2. Recognize the key feature of a CD: The money is locked in for a fixed period, meaning the depositor cannot withdraw the funds without incurring a penalty.
3. Compare a CD to a savings account: Unlike a savings account, which allows flexible withdrawals, a CD requires the depositor to commit to a fixed term, which is why it typically offers a higher interest rate.
4. Clarify why the interest rate is higher: Since the bank can rely on the funds being available for a fixed period, it can use them for longer-term investments, allowing it to offer a higher return to the depositor.
5. Understand the penalty for early withdrawal: If the depositor withdraws funds before the maturity date, they will face a penalty, which reinforces the fixed-term nature of the CD.