Which statement about certificates of deposit CDs is generally true?

Introduction / Context:
Certificates of deposit, often abbreviated as CDs, are popular time deposit products offered by banks. They appear frequently in financial literacy and banking awareness exams. Understanding their basic features helps individuals choose between CDs, savings accounts and more liquid options such as current or checking accounts. This question focuses on a simple but important characteristic of CDs, namely the fixed term commitment.

Given Data / Assumptions:

• A certificate of deposit is a type of time deposit with a fixed maturity date.
• The depositor agrees to keep funds in the CD until maturity.
• Banks usually pay a specified interest rate for the term.
• Early withdrawal is possible in some cases but usually involves a penalty or loss of interest.

Concept / Approach:
The defining feature of a CD is that the depositor commits money for a specified period, such as six months or three years. In return, the bank often offers a higher interest rate than on regular savings accounts because the funds are more stable. Liquidity is therefore lower than in savings or current accounts. Claims that CDs are the most liquid or that they offer lower interest than savings accounts are generally incorrect. The correct option must state that the money must remain for the specified period and that early withdrawal may lead to penalties.

Step-by-Step Solution:
Step 1: Recall that CDs are time deposits with fixed terms, not demand deposits. Step 2: Recognise that because funds are locked in, banks can plan their use more confidently and can offer higher interest rates. Step 3: Understand that early withdrawal normally triggers a penalty or forfeiture of a portion of interest. Step 4: Compare the options and identify the one that correctly summarises this fixed term and penalty structure. Step 5: Reject options that claim maximum liquidity, lower interest than savings accounts or no interest at all, as these contradict the time deposit nature of CDs.

Verification / Alternative check:
To verify, consider a bank offering a one year CD with a higher interest rate than its regular savings account. The bank brochure states that if a customer withdraws before one year, a penalty equal to several months of interest will be charged. This is standard practice. In contrast, the bank savings account allows withdrawals at any time but pays a lower rate. This comparison confirms that CDs require funds to remain for a set period and that they are not the most liquid account type. The correct option reflects this reality accurately.

Why Other Options Are Wrong:
Option B is wrong because CDs are less liquid than savings or current accounts; they do not allow unlimited free withdrawals. Option C is incorrect because CDs typically offer higher, not lower, interest rates than savings accounts with similar risk, precisely because of reduced liquidity. Option D cannot be correct because it claims that all statements, including conflicting ones, are true. Option E is clearly false, as CDs are interest bearing deposit products and not just record keeping tools.

Common Pitfalls:
A common pitfall is to focus only on interest rates without considering liquidity and penalties. Some savers lock all funds into CDs and then face penalties when they unexpectedly need cash. Another mistake is to assume that all fixed deposits and CDs are identical worldwide, when specific terms can vary by country and institution. For exam purposes, however, recognising that CDs are time deposits with fixed terms and potential early withdrawal penalties is sufficient to choose the correct answer.

Final Answer:
The money has to remain in the certificate of deposit account for a specified period of time, and early withdrawal may result in penalties.