August 8, 2014 in Investing

Quiz: What do you know about CDs?

If you clicked on this headline thinking this was a quiz about music compact discs, don’t feel bad.

A recent Bankrate survey finds that 45 percent of Americans are not very familiar, or are not at all familiar, with certificates of deposit.

That naivete jumps for the segment of the population that grew up after the era of eight-track tapes and 45s. The survey found that 69 percent of 18- to 29-year-olds don’t know anything about CDs or are at most, only vaguely familiar with them.

See if you know more about CDs than the average consumer by taking our quiz.

a. 0.23 percent
b. 3.1 percent
c. 0.05 percent
d. 0.95 percent
Answer: A. 0.23 percent.

CD yields have been in free fall since the Federal Reserve dropped short-term interest rates to near zero in December 2008.
Next Question
a. An investment that pools together money from many different investors and puts it into stocks, bonds and other securities.
b. A time deposit with a fixed maturity date, usually from three months to five years. A penalty is charged for withdrawing funds before the maturity date.
c. A high-yield account that pays higher interest rates than a savings account. In exchange for higher rates, there are more restrictions on withdrawals.
Answer: B.

Answer A is the definition of a mutual fund, while answer C is the definition of a money market account.
Next Question
a. As a place to stash cash in the event of a natural disaster.
b. As a way to set aside money for the down payment on a house in three years.
c. As a way for a young consumer to begin saving for retirement.
Answer: B.

In general, CDs require a time commitment during which a consumer is not supposed to touch the money, so it's not good as a short-term savings or checking replacement.
Next Question
a. Three months' interest
b. 4 percent of amount withdrawn
c. Six months' interest
d. $25 and 1 percent of amount withdrawn
Answer: C.

According to Bankrate's latest survey of early withdrawal penalties for CDs, six months' interest is the most common penalty for pulling money out early from a two-year CD.
Next Question
a. 60 percent
b. 28 percent
c. 50 percent
d. 12 percent
Answer: B.

Only 28 percent of consumers have put money in a CD. Younger consumers are much less likely than older consumers to have ever put money in a CD, Bankrate’s survey shows.
Next Question
a. When an investor buys a series of CDs at regular intervals.
b. When a CD is sold by a middleman who offers fairly competitive prices on the CDs.
c. When a CD gives you an option to bump up to a higher interest rate at some point during the term of the CD.
Answer: A.

Laddering evens out rate fluctuations and makes cash available regularly. For instance, you can take $25,000 and invest equal amounts of it in one-year, two-year and five-year CDs. When the one-year matures, you can re-enroll it in a five-year CD.