27 Between an FDICinsured NOW account and an FDICinsured 5ye

27) Between an FDIC-insured NOW account and an FDIC-insured 5-year CD, which would pay the lower (pts) interest rate and why? The NOW account because of higher liquidity. The NOW account because of lower risk. The 5-year CD because of lower risk. The 5-year CD because of higher liquidity.

Solution

In case of FDIC-insured NOW account, accountholder can withdraw his or her money at any time. Moreover, he or she can write check against this amount as well.

There is no such convinence for depositor in case of 5-year CD.

So, NOW account is more liquid than 5-year CD.

Due to this aspect, interest rate offered on NOW account is lower than the interest rate offered on 5-year CD.

Thus,

FDIC-insured NOW account would pay the lower interest rate because of higher liquidity.

Hence, the correct answer is the option (1) [The NOW account because of higher liquidity].