Final answer:
The debt instrument described is a negotiable certificate of deposit (CD), offering a higher interest rate for money deposited for a fixed period and a substantial penalty for early withdrawal. The correct answer is option (B)
Step-by-step explanation:
The debt instrument sold by a bank to its depositors that pays annual interest and returns the principal at maturity is called a negotiable certificate of deposit (CD). A CD is an agreement where a depositor places a lump sum of money into an account for a fixed period, often ranging from a few months to several years, and in return, the bank pays a higher interest rate than that offered on a regular savings account. CDs are valuable financial assets as they represent a claim on the property and the income of the borrower.
Withdrawing funds from a CD before the agreed time usually incurs a substantial penalty for early withdrawal. This feature encourages savers to let their investment mature, ensuring they receive the full benefits of the compound interest agreed upon at the outset.
Therefore, the correct answer to the student's question is B) a negotiable certificate of deposit.