Other Bank Accounts

Question 10 • Financial Math - MA2007

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

Answer

Certificates of deposit involve a longer time commitment than money market accounts, so they carry a greater return.

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.

They do not offer a better interest rate. Money market accounts tend to have the best interest rates of any bank deposit.

Money market accounts invest your money but sometimes lose some of it, so the lower interest rate pays for the difference.

Explanation

Certificates of deposit usually require you to leave your money deposited for a set period, while money market accounts generally allow easier access to your funds. That longer commitment gives the bank more certainty about using the money, so CDs tend to offer a higher interest rate in return. Choice A correctly identifies the longer time commitment; CDs are not reserved only for the bank’s most valuable customers.

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