Multiple Choice
To the nearest year, it will take about how many years to double the original investment at an annual interest rate of 8\% compounded annually?
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10. Time Value of Money
Time Value of Money Equations
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Which of the following best describes a financial instrument where your money is invested for a fixed period and cannot be withdrawn before maturity without penalty?
A
Certificate of Deposit (CD)
B
Savings Account
C
Checking Account
D
Money Market Account
Verified step by step guidance1
Understand the concept of a financial instrument: A financial instrument is a contract that represents an asset to one party and a liability to another. Examples include savings accounts, checking accounts, certificates of deposit (CDs), and money market accounts.
Analyze the characteristics of each option provided: Savings accounts and checking accounts typically allow for flexible withdrawals without penalties. Money market accounts may have withdrawal restrictions but are not fixed for a specific period.
Focus on the definition of a Certificate of Deposit (CD): A CD is a financial instrument where money is invested for a fixed period, and early withdrawal before maturity usually incurs a penalty.
Compare the options: Based on the definition, a Certificate of Deposit (CD) matches the description of a financial instrument where funds are locked for a fixed period and cannot be withdrawn early without penalty.
Conclude the reasoning: The correct answer is Certificate of Deposit (CD) because it aligns with the characteristics described in the problem.
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