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# Why do certificates of deposit tend to offer better interest rates than money market accounts?

Updated: Jul 30, 2022

Irene invested \$27,000 in a twelve-year CD bearing 8.0% interest, but needed to withdraw \$6,000 after three years. If the CD's penalty for early withdrawal was eighteen months' worth of interest on the amount withdrawn, when the CD reached maturity, how much less money did Irene earn total than if she had not made her early withdrawal? a. \$3,600 b. \$4,320 c. \$720 d. \$5,040

D

Adam invested \$12,000 in a six-year CD that paid 7.1% interest, but later needed to withdraw \$2,500 early. If the CD's penalty for early withdrawal was eighteen months' worth of interest on the amount withdrawn, how much of a penalty did Adam pay? a. \$138.89 b. \$177.50 c. \$266.25 d. \$319.50

C

Larissa invested \$19,000 in an eleven-year CD giving 7.5% interest, but needed to withdraw \$2,500 after four years. If the CD's penalty for early withdrawal was one year's worth of interest on the amount withdrawn, how much money did Larissa have when the CD reached maturity, not including the amount she withdrew? a. \$13,612.50 b. \$30,675.00 c. \$30,112.50 d. \$14,175.00

B

You have \$5,400 to deposit. If you deposit the money in a savings account at your local bank, you will earn 1.49% annual interest and will be able to make ATM withdrawals at your bank's ATMs. If you deposit the money in an online savings account, you will earn 4.44% annual interest, but you will be charged \$5 every time you make an ATM withdrawal. Assuming that your ATM withdrawals do not reduce the amount of interest you earn, roughly how many times a year can you make an ATM withdrawal in order for the local savings account to be a better deal than the online savings account? a. 32 b. 27 c. 22 d. 15

A

Livvi invests \$19,430 in a savings account at her local bank which pays 1.8% simple annual interest. She also deposits \$16,470 in an online savings account which pays 2.7% simple annual interest. After six years, which account will yield more interest, and approximately how much more interest will it yield? a. The online account will give \$2,668 more interest. b. The online account will give \$570 more interest. c. The local account will give \$2,960 more interest. d. The local account will give \$2,390 more interest.

B

Haley invests \$16,820 in a nine-year CD bearing 5.8% interest, and \$21,950 in an online savings account giving 3.0% interest. When the CD reaches maturity, how much more interest will it have generated than the savings account? a. \$5,129.72 b. \$3,650.32 c. \$2,853.54 d. \$2,276.46

C

Lloyd has \$20,000 to deposit. His wife's illness leads to medical expenses beyond what their insurance will cover, so Lloyd must often quickly access his savings. Recommend a good way for Lloyd to store his money. a. A two-year CD giving 9.1% interest annually b. An online savings account giving 3.6% interest c. A series of six-month money market accounts paying 4.6% interest d. A checking account with free checks

B

True or False: A traditional, physical bank with online options is a type of online bank.

T(?)

You have \$6,500 to deposit. If you deposit the money in a savings account at your local bank, you will earn 1.45% annual interest and will be able to make ATM withdrawals at your bank's ATMs. If you deposit the money in an online savings account, you will earn 2.25% interest, but you will be charged \$4 every time you make an ATM withdrawal. Assuming that your ATM withdrawals do not reduce the amount of interest you earn, how many ATM withdrawals must you make in a year for the local savings account to be a better deal than the online savings account? a. 5 b. 12 c. 14 d. 10

C

Ashley invests \$9,720 in a one-month money market account paying 3.16% simple annual interest and \$8,140 in a two-year CD yielding 3.23% simple annual interest. Assuming Ashley does not reinvest or renew these investments, how much money will she have when both investments reach maturity, to the nearest dollar? a. \$550 b. \$1,080 c. \$17,310 d. \$18,411

D

Why do certificates of deposit tend to offer better interest rates than money market accounts? a. Certificates of deposit involve a longer time commitment than money market accounts, so they carry a greater return. b. Certificates of deposit are only available to the bank's most proven and valuable customers, so the bank can afford to give a greater interest rate on them. c. They do not offer a better interest rate. Money market accounts tend to have the best interest rates of any bank deposit. d. Money market accounts invest your money but sometimes lose some of it, so the lower interest rate pays for the difference.

B

Greg invests \$2,680 in a CD paying 7.0% interest, and \$3,060 in an online savings account paying 4.5% interest. How much more interest will the CD have earned than the savings account after 1 year? a. \$25.90 b. \$49.90 c. \$380.00 d. \$499.00

B

Some online banks offer "online bill pay." What does this mean? a. There is a fee associated with online banking, but the bank will waive that fee as an incentive. b. You can visit your bank account online and electronically transfer funds to pay your bills. c. The bank will automatically pay your internet bill as a reward for banking with them. d. You can use that bank account, and only that bank account, to pay for purchases you make online.

B

Rate the following bank accounts from most to least liquid: CD, savings account, checking account, money market account. a. CD, savings account, checking account, money market account b. Savings account, checking account, CD, money market account c. CD, money market account, savings account, checking account d. Checking account, savings account, money market account, CD

D

Rachel invested \$15,000 in a nine-year CD giving 8.5% interest, but needed to withdraw \$4,000 after two years. If the CD's penalty for withdrawal was six months' worth of interest on the amount withdrawn, how much money did Rachel have when the CD reached maturity, not including the amount she withdrew? Round answer to the nearest whole dollar. a. \$19,925 b. \$8,795 c. \$19,795 d. \$12,965

A(?)

Ian invests \$13,670 in a savings account at his local bank which gives 1.9% simple annual interest. He also invests \$6,040 in an online savings account which gives 4.5% simple annual interest. After nine years, which one will have earned more interest, and how much more interest will it have earned, to the nearest dollar? a. The local account will have earned \$7,521 more interest. b. The local account will have earned \$3,199 more interest. c. The online account will have earned \$3,090 more interest. d. The online account will have earned \$109 more interest.

D

Which of these can be considered "online banking?" I. A brick-and-mortar bank that allows its customers to transfer money online. II. A bank that has only a few branches but has customers depositing money online. III. A bank that does not exist as a real building, but only has an internet presence. a. I and II b. II and III c. III only d. I, II, and III

D

Norm has \$15,000 to deposit. His daughter is a junior in high school and plans to go to college. Recommend the best way for Norm to store his money. Note that the interest rates are expressed on an annual basis. a. A four-year CD paying 4.8% interest, with a substantial penalty for early withdrawal b. An online savings account offering 2.3% interest c. A money market account paying 3.5% interest, renewable for three-month commitments d. A checking account with no monthly fees

C

Orlando invested \$16,000 in an eight-year CD bearing 6.5% simple annual interest, but needed to withdraw \$3,500 after five years. If the CD's penalty for early withdrawal was one year's worth of interest on the amount withdrawn, when the CD reached maturity, how much less money did Orlando earn total than if he had not made his early withdrawal? a. \$227.50 b. \$682.50 c. \$910.00 d. \$455.00

D

Which of the following are advantages of certificates of deposit (CDs) over savings accounts? I. CDs are more readily accessible than savings accounts. II. CDs offer greater interest rates than savings accounts. III. CDs have greater FDIC backing than savings accounts. a. I and II b. II only c. I and III d. none of these

B(?)

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