DECA Personal Financial Literacy (PFL) Practice Test – Prep & Study Guide

When withdrawing money early from a certificate of deposit (CD), John typically faces the consequence of paying a bank penalty for that early withdrawal. CDs are time deposit accounts, meaning that the funds are locked in for a fixed term, and if the investor needs to access the money before the term expires, financial institutions often impose a penalty. This penalty can come in various forms, such as a reduction in interest earned or a flat fee based on the amount withdrawn.

The structure of a CD incentivizes individuals to keep their funds deposited for the agreed-upon term to ensure they receive the promised interest. Therefore, by penalizing early withdrawals, banks protect their own interests and ensure that the funds remain stable for a longer time, which is essential for their lending practices.