Dear Dr. Don

I know this is a dumb question but please tell me the difference between a CD and a money market account.

-- Johanna Juncture

Dear Johanna

As a college professor I'll tell you it's true there's no such thing as a dumb question. And there are smart answers. A smart answer to a question promotes understanding. I'll shoot for that goal.

CDs and money market accounts are both "bank products." By that I mean they are deposit accounts in a bank. The bank determines the interest paid on the accounts and they are FDIC-insured up to the limits of that insurance.

A CD or certificate of deposit is a term investment in a bank account. The yield term renewal and any penalties for early withdrawal are spelled out in the deposit agreement. CDs sometimes have options attached to them such as being able to add funds to the account or the ability to increase the yield if interest rates head higher (also known as a step-up provision). CDs also may be callable.

The typical CD is non-negotiable meaning it can't be sold to another investor. But a brokered CD is a negotiable instrument and can be sold to another investor.

A money market account is not quite a checking account. A checking account is known as a demand deposit account or a transaction account. The funds are available on demand.

In contrast an MMA is not a transaction account because it has limitations on the type and frequency of withdrawal and transfer activity you can make each month. The account has no defined term and the interest rate will fluctuate based on market conditions and the bank's management.

If you have no immediate need for the money and the rate on an MMA is comparable to the rate on a CD I'd choose the MMA in an upward interest rate environment (because of its adjustable rate) and the CD in a downward interest rate environment (because of its fixed rate).

Use Bankrate's compare rates feature to shop rates on CDs and MMAs in your market and nationwide.Ask the adviserTo ask a question of Dr. Don go to the "Ask the Experts" page and select one of these topics: "Financing a home" "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content including the guidance of its advice-and-expert columns and this Web site is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Create a news alert for "CDs"