Question

In two or more complete sentences, discuss the advantages and disadvantages of investing in a CD versus investing in a basic savings account.

a) CDs typically offer higher interest rates but lack liquidity, while basic savings accounts provide easy access to funds with lower interest rates.

b) Basic savings accounts offer higher liquidity but lower interest rates compared to CDs, which have higher interest rates with restricted access to funds.

c) Both CDs and basic savings accounts offer similar interest rates, but CDs provide more flexibility in terms of withdrawal options.

d) Investing in a CD or a basic savings account yields similar benefits and drawbacks, with the main difference being the duration of the investment.

Answer 1

CDs offer higher interest rates but lock in your money for a fixed term with penalties for early withdrawals, whereas basic savings accounts have lower interest rates but offer high liquidity. Both are low-risk and insured by the FDIC for up to $250,000.

Step-by-step explanation:

When comparing certificates of deposit (CDs) and basic savings accounts, there are distinct advantages and disadvantages to each. CDs often offer higher interest rates than basic savings accounts, serving as an incentive for depositors to lock in their money for a fixed term. This could range from a few months to several years, and during this time, funds are much less liquid. Should you need to access your money before the CD matures, you will face a substantial penalty for early withdrawal. On the other hand, basic savings accounts offer greater liquidity, allowing depositors easy access to their funds whenever needed. However, this convenience comes at the cost of lower interest rates compared to CDs. Notably, the safety of both types of accounts is generally similar, as they are often insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, ensuring a low-risk investment.