Banking Practice Exam

The instrument known to typically offer higher interest rates, thereby encouraging larger deposits, is certificates of deposit (CDs). CDs are time deposits held at a financial institution that typically require funds to be locked in for a specified term, which can range from a few weeks to several years. Because the depositor commits their money for a set period, banks are able to offer a more attractive interest rate compared to more liquid account types.

This higher yield is a trade-off for the reduced liquidity, as funds cannot be accessed without penalty until the maturity date is reached. As a result, this structure appeals to savers who are looking for a secure way to earn a higher return on their deposits over a defined period.

In contrast, demand deposits provide lower interest rates because they allow for quick access to funds at any time, while NOW accounts offer limited liquidity and are generally not designed for maximizing interest yields. Savings accounts typically feature lower interest rates than CDs because they allow for more flexible access to funds.