The Ultimate Certificates of Deposit Quiz

By: HowStuffWorks.com Contributors

The Ultimate Certificates of Deposit Quiz
Image: iStockphoto.com/IuriiSokolov

About This Quiz

Certificates of deposit or CDs offer a higher interest alternative to low interest savings accounts. However, if you need your funds available to you on a moment's notice, CDs may not be right for you. The early-withdrawal fee might be a deal-breaker. Take our quiz and find out if CDs are the right investment for your needs.
The interest rate on savings accounts tends to be:
low
Though the interest rate on savings accounts are usually quite low, many people prefer keeping their money in one because they are no-risk.
high
unfair

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Stocks are usually considered _____risk investments.
low
high
Stocks are considered high-risk compared to savings accounts, since there is really no way to predict how they will fare in the future.
no

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Certificates of deposit (CDs) offer a _____ interest rate than savings accounts.
lower
higher
While certificates of deposit offer a higher rate of interest than savings accounts, the drawback is their maturity date. You can't withdraw your money early without paying a penalty.
fairer

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The penalty for withdrawing money from a CD before its maturity date is called:
an early withdrawal fee
If you would like to withdraw your money before the maturity date of a certificate of deposit, you will have to pay an early withdrawal fee.
a late-withdrawal fee
a deposit-withdrawal fee

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Certificates of deposit are a great long-term investment to fund expenses such as:
college tuition
retirement
both of the above
CDs are a great long-term investment for funding expenses like your child's college tuition, a home down payment or your retirement that you expect further down the road.

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Insurance that protects the money you have in bank accounts and CDs is provided by:
the County Deposit Insurance Corporation
the State Deposit Insurance Corporation
the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) insures all savings accounts and certificates of deposit for as much as $250,000 per depositor, per bank.

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Which type of interest increases each time its taken?
simple interest
compound interest
In the case of compound interest, every time your funds get interest added to them, the next interest is taken on the total amount of your original funds plus the previously earned interest. Although the interest rate remains constant, the amount of interest added increases each time.
fixed interest

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Which of the following terms represents the simplest interest rate at the start of a year?
the annual percentage rate
The annual percentage rate (APR) is the simple interest rate. The annual percentage yield (APY) refers to the rate of return you earn in a year allowing for compounded interest.
the annual percentage yield
the annual percentage credit

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CD laddering means dividing up your funds and investing different amounts in different:
CDs
To get the benefits of CD laddering, you should buy several CDs with different maturity dates. As the first one expires, you can either choose to keep those funds liquid or you might reinvest the funds from the first CD into one of the other CDs that have a longer life and therefore a higher interest rate.
money market accounts
savings accounts

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It's a good idea to avoid taking _____while holding a CD.
a bus
a loan
Try to avoid a situation where you need to take out a loan while holding a CD. If the interest you pay on your loan exceeds the interest you're making on your CD, you will actually be losing money.
a vacation

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You Got:
/10
iStockphoto.com/IuriiSokolov

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