Wanda Clark expects interest rate to decline in the next few months. To maximize her earnings, she should put her savings in a
A. 2-year cd
B. 6-month cd
c. money market
d. passbook savings account
What do you think?
I agree.
Thanks
You're welcome.
To determine the best option for Wanda to maximize her earnings, we need to understand how interest rates affect different types of savings accounts. Interest rates determine the return Wanda will earn on her savings. When interest rates are expected to decline, it's generally beneficial to lock in a higher rate for a longer period before it goes down.
Let's analyze the options:
A. 2-year CD (Certificate of Deposit): This is a fixed-term deposit where you agree to keep your money for a specific time (in this case, 2 years) in exchange for a fixed interest rate. If Wanda expects interest rates to decline, the 2-year CD may not be the best option. By locking her money for 2 years, she may miss out on potentially higher rates in the future.
B. 6-month CD: Similar to the 2-year CD, a 6-month CD also offers a fixed interest rate, but for a shorter period. Considering Wanda expects interest rates to decline, a shorter-term CD, such as the 6-month option, would be more suitable. It allows her to benefit from the current higher interest rate for a short period while being able to reinvest her money at a potentially higher rate soon.
C. Money market: Money market accounts are investment instruments that usually offer higher interest rates than regular savings accounts. They invest in short-term government and corporate securities. However, the interest rates of money market accounts tend to change based on market conditions. If Wanda expects interest rates to decline, it might not be the most lucrative option in the long term.
D. Passbook savings account: These accounts typically offer lower interest rates, as they are designed for convenient access to funds rather than high returns. If Wanda wants to maximize her earnings, a passbook savings account may not be the best choice, as the interest rates might be lower and not optimize her investment.
Given Wanda's expectation of declining interest rates, the option that provides flexibility and potential for reinvestment at a higher rate would be the 6-month CD (option B). By choosing this option, she can benefit from the current higher interest rates for a portion of her savings while having the opportunity to reinvest at more favorable rates in the near future.