Final answer:
Depository institutions pay interest to customers for holding their money in accounts like savings accounts and certificates of deposit (CDs). Interest compensates consumers for allowing the bank to use their funds and is considered a cost of the bank's liabilities.
Step-by-step explanation:
When a depository institution pays a customer money for holding their money, it is called interest. Consumers deposit money into various types of accounts, such as checking accounts, savings accounts, or certificates of deposit (CDs) at depository institutions. These institutions consider the deposited money as liabilities because they must return it to the account holders upon request. To compensate consumers for depositing their money and to cover the costs of these liabilities, banks offer interest, especially on savings accounts and CDs. The rate of interest on a CD is typically higher than that of a savings account but comes with the condition that the money must be kept in the account for a fixed period. Withdrawing funds before this period may result in a substantial penalty.