Which type of account typically offers a higher interest rate because the institution invests deposited money?

A money market account typically offers a higher interest rate than traditional checking and passbook savings accounts because it invests deposited funds in short-term, interest-earning securities. This type of account usually requires a higher minimum balance and allows limited check-writing capabilities. The higher interest rate is a result of the financial institution engaging in investment activities with the deposited money, thus providing a better return to the account holders compared to accounts that primarily focus on liquidity and easy access like checking accounts or lower-yield savings accounts.

In contrast, checking accounts are designed for daily transactions and tend to offer minimal interest rates. Passbook savings accounts, while they may provide slightly higher rates than checking accounts, do not typically reach the levels available in money market accounts. Certificates of deposit (CDs) generally offer higher rates as well, but they require the funds to remain untouched for a predetermined period, making them less flexible than money market accounts. The investment strategy utilized by money market accounts is what sets them apart in terms of yield.