What types of risk should Kyle consider when investing in a certificate of deposit?

When evaluating a certificate of deposit (CD), it is essential for Kyle to consider certain risks that are particularly relevant to this type of investment.

Liquidity risk stands out because CDs typically have a fixed term, ranging from a few months to several years. During this period, if Kyle needs access to his funds, he may face penalties for early withdrawal, making the investment less liquid compared to other savings options. This means he should be aware of the timeframe in which he can access his money without incurring additional costs.

Interest rate risk is also a significant consideration. Since the interest rates for CDs are locked in for the duration of the term, if market interest rates rise after Kyle invests in a CD, he could miss out on higher potential returns from other investment opportunities. This risk highlights the importance of knowing when he might need the funds and the current interest rate climate.

Focusing on liquidity and interest rate risks provides Kyle with a clear understanding of how a CD could fit within his overall investment strategy, especially in relation to his financial goals and market conditions.