### What is a Certificate of Deposit (CD)? - [x] A bank investment product that pays a determined amount after a period of years - [ ] A stock option - [ ] A type of bond - [ ] A mutual fund investment > **Explanation:** A Certificate of Deposit (CD) is a financial product offered by banks that provides an interest rate premium in exchange for the customer's agreement to leave a lump-sum deposit untouched for a predetermined period. ### When can a CD be cashed out? - [ ] Any time without penalty - [ ] Only at the end of the calendar year - [x] After the specified period of years - [ ] Only when the bank manager allows it > **Explanation:** CDs can be cashed out at the end of the specified term agreed upon at the time of purchase. Cashing out a CD before the end of its term can often result in penalties. ### How is the interest rate on a CD typically determined? - [ ] Random selection - [x] Based on the term length and market conditions - [ ] By the Federal Reserve - [ ] Through negotiation with a bank manager > **Explanation:** The interest rate on a CD is determined by the market as well as the length of the time commitment. Longer-term CDs typically offer higher interest rates than shorter-term CDs because the bank gets to use the money for a longer period. ### Why might someone choose a 10-year CD over a one-year CD? - [x] To get a higher interest rate - [ ] To access their money quicker - [ ] Because it's required by law - [ ] To avoid paying taxes > **Explanation:** Longer-term CDs usually offer higher interest rates compared to shorter-term CDs. Therefore, someone might choose a 10-year CD to benefit from the higher interest rates, even though their money will be locked away for a longer period. ### What is a primary advantage of investing in a CD? - [ ] High growth potential - [x] Absolute safety of the investment - [ ] Flexible withdrawal options - [ ] Exposure to the stock market > **Explanation:** One of the main advantages of investing in a CD is the safety it provides. The money you invest is insured and will be returned along with interest, which makes it a low-risk investment option. ### What could be a drawback of investing in a CD? - [ ] Significant risk of loss - [x] Limited growth potential - [ ] Lack of liquidity - [ ] Ineligibility for FDIC insurance > **Explanation:** CDs offer limited growth potential compared to other investment options like stocks or mutual funds. This is because they provide relatively low interest rates, especially on shorter-term CDs. ### How does the length of the term impact the interest rate on a CD? - [x] Longer terms generally offer higher interest rates - [ ] It has no impact - [ ] Shorter terms offer higher interest rates - [ ] The terms fluctuate randomly > **Explanation:** Banks generally pay higher interest rates for longer-term CDs to compensate for the lack of access to the funds over a longer period. ### What is a common use for CDs? - [ ] Funding high-risk ventures - [x] Serving as a savings vehicle with guaranteed growth - [ ] Day trading - [ ] Real estate investment > **Explanation:** CDs are commonly used as a savings vehicle where individuals can place their money and know that it will grow with a guaranteed interest return. This makes it a low-risk, dependable option for conservative investors. ### What happens if a CD is cashed out before maturity? - [ ] You get a bonus payout - **[ ] You may incur penalties - [ ] The account renews automatically - [ ] Nothing happens > **Explanation:** Cashing out a CD before it reaches its maturity date usually involves penalties, which can reduce the interest earned and sometimes even the principal balance. ### Who provides insurance for CDs in the United States? - [ ] Securities and Exchange Commission (SEC) - [ ] State governments - [x] Federal Deposit Insurance Corporation (FDIC) - [ ] The Federal Reserve > **Explanation:** In the United States, the Federal Deposit Insurance Corporation (FDIC) insures CDs up to the applicable limits, ensuring the safety of the depositor's funds. ### Why might CDs not be suitable for someone looking to grow money quickly? - [ ] Because they're illegal for quick growth strategies - [x] Because they offer comparatively low interest rates - [ ] Because they're too risky - [ ] Because you can withdraw money anytime without penalty > **Explanation:** CDs tend to offer relatively low interest rates compared to other investment options, such as stocks or mutual funds. As a result, they are not a suitable option for someone who aims to grow their money quickly. ### Which factor does NOT influence the interest rate of a CD? - [ ] Term Length - [x] Gender of the account holder - [ ] Market conditions - [ ] Bank policies > **Explanation:** The interest rate of a CD depends on the term length, market conditions, and the bank's policies, among others. However, the gender of the account holder has no influence on the interest rate. ### For whom might a CD's absolute safety be particularly attractive? - [x] Conservative investors - [ ] Aggressive investors - [ ] Day traders - [ ] Real estate flippers > **Explanation:** CDs are particularly attractive for conservative investors who prioritize the safety of their principal and guaranteed returns over potentially higher but uncertain gains. ### What is the term "maturity" in the context of CD? - [ ] When the account holder turns 18 - [x] When the deposit time period ends - [ ] When the interest rate becomes double - [ ] When the account balance hits $10,000 > **Explanation:** "Maturity" refers to the end of the CD's specified term period, at which point the principal amount of the CD, along with accrued interest, can be withdrawn without penalties. ### Is the interest from a CD subject to taxes? - [ ] No, it's tax-free income - [x] Yes, it's generally subject to federal and state taxes - [ ] Only if it's more than $5000 - [ ] Only in certain states > **Explanation:** The interest earned on CDs is generally subject to federal and state income taxes, and should be reported for tax purposes appropriately.