What do Certificates of Deposit (CDs) generally offer compared to savings accounts?

Certificates of Deposit (CDs) generally offer higher interest rates compared to savings accounts. The reason for this difference lies in the nature of how CDs are structured. When consumers invest in a CD, they agree to lock in their money for a specified period of time, which can range from a few months to several years. This commitment allows banks to use those funds for longer-term lending or investment purposes, justifying the higher interest rates they offer to customers.

In contrast, savings accounts provide greater liquidity, allowing customers to withdraw their funds without penalties at any time. This flexibility often results in lower interest rates, as the banks do not have the same assurance of holding those funds for an extended period.

The other options reflect characteristics that are not typically associated with CDs: they often do have penalties for early withdrawals, and they do not offer higher liquidity than savings accounts. Therefore, choosing a CD over a traditional savings account can be beneficial for individuals seeking to maximize interest earnings on their investments, provided they do not need immediate access to their funds.