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Multiple Choice
Which of the following best explains why a savings account is considered more liquid than a certificate of deposit (CD)?
A
Savings accounts are insured by the government, but CDs are not, making savings accounts more liquid.
B
Savings accounts always offer higher interest rates than CDs, making them more attractive for short-term investments.
C
CDs can be converted to cash instantly at any bank, while savings accounts require a waiting period.
D
Funds in a savings account can be withdrawn at any time without penalty, whereas CDs typically require funds to be held for a fixed period or incur a penalty for early withdrawal.
Verified step by step guidance
1
Understand the concept of liquidity: Liquidity refers to how quickly and easily an asset can be converted into cash without significant loss of value.
Compare the characteristics of savings accounts and certificates of deposit (CDs): Savings accounts allow funds to be withdrawn at any time without penalty, whereas CDs require funds to be held for a fixed period and may incur penalties for early withdrawal.
Recognize the implications of penalties: The penalty for early withdrawal from a CD reduces its liquidity compared to a savings account, which has no such restrictions.
Consider the accessibility of funds: Savings accounts provide immediate access to funds, making them more liquid than CDs, which have restrictions on access.
Conclude based on the definition of liquidity: Since savings accounts allow unrestricted access to funds without penalties, they are considered more liquid than CDs.