ACCA Financial Management (F9) Certification Practice Exam

What type of investment does a Certificate of Deposit (CD) represent?

1. Equity investment with variable returns

2. Fixed-rate, time deposit with a maturity

3. Variable rate bond issued by the government

4. Long-term equity investment in mutual funds

The correct answer is: Fixed-rate, time deposit with a maturity

A Certificate of Deposit (CD) is classified as a fixed-rate, time deposit with a maturity. This means that when you invest in a CD, you are essentially lending money to a bank or financial institution for a specified period of time. In exchange for this, the bank agrees to pay interest on the amount deposited, typically at a fixed rate. The key features of a CD include its guaranteed return, as the interest rate is fixed at the time of deposit, and its maturity date, which is when the deposit and accrued interest are returned to the investor. This investment is low-risk, providing more security compared to equity investments, which can fluctuate in value and are subject to market risks. In contrast, other types of investments mentioned, such as equities and bonds, have different characteristics, including variable returns or higher risks, making them less comparable to the fixed and secure nature of a CD. Thus, defining a CD as a fixed-rate, time deposit accurately captures its essence as a conservative investment vehicle suitable for those seeking predictable returns.