ACCA Financial Management (F9) Certification Practice Exam

What type of financial instrument is represented by a Certificate of Deposit (CD)?

1. Long-term equity instrument

2. Short-term unsecured debt

3. Time deposit earning interest over a fixed term

4. Government issued bond

The correct answer is: Time deposit earning interest over a fixed term

A Certificate of Deposit (CD) is a financial instrument that signifies a time deposit, which earns interest over a fixed term. When individuals invest in a CD, they agree to keep their funds deposited for a certain period—typically ranging from a few months to several years—in exchange for a higher interest rate than a regular savings account. This fixed term means that the money is locked in for the duration, and in return, the depositor receives a guaranteed return on their investment once the term ends. CDs are generally issued by banks and are regarded as a safe investment, as they are insured by the FDIC in the United States, up to certain limits. The predictability of the returns and the safety of the principal amount makes CDs an attractive choice for risk-averse investors seeking a guaranteed yield over a specific duration. This option accurately captures the defining characteristics of a CD as a time deposit, distinguishing it from other financial instruments, such as equity instruments or unsecured debts, which do not typically have fixed terms or guaranteed interest earnings in the same manner.