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CD Investments

CD's provide a safe investment with guaranteed returns.

Certificates of Deposit (CDs)

CDs, which are available from banks or credit unions, provide a safe investment with moderate yields.  They are Federal Deposit Insurance Corporation (FDIC) guaranteed up to $250,000 just like any other bank account.

While their return is higher than money-market bank accounts, CDs have certain restrictions.  CDs require you to lock up a fixed amount of money (initial deposit) for a pre-determined period of time (term) at a fixed interest rate.  Withdrawing money prior to the maturity date results in a substantial penalty (i.e., forfeiture of a part of your interest).  Generally, the larger your initial deposit and the longer the term, the higher your interest rate will be.  Keep in mind however that once you lock up your money in a CD, you cannot take advantage of any rising interest rates that may become available in the marketplace.

Brokerage versus Bank CDs -- Brokerage CDs provide additional flexibility and generally greater returns than Bank CDs for investors with larger amounts of money to invest.  Brokerage CDs are issued by banks for the convenience of the brokerage firms' customers.  Brokerage CDs are generally more liquid than bank CDs since they can be traded on the secondary market and sold prior to maturity (for a reduced return).  They can also be transferred from one brokerage firm to another.

Bonds

Bonds, like CDs, are essentially a type of loan. The bondholder is loaning money to a government or corporation that issues the bond for a set period in return for a specific amount of interest. Bonds differ from CDs in that they are generally the better choice when interest rates are low. When interest rates rise, purchased bonds become less valuable and their prices decrease. Regardless, they are generally safe, and when held to maturity, both the principal and interest will be paid.

Government bonds are covered in detail on the US Treasury Securities page of this website.

Combining Stocks and Bonds

Combining stocks and bonds for a Steady Income Stream-- One technique often used by savvy investors is to sale shares of stock or mutual funds at market highs and reinvest the proceeds in bonds.  This investment could take the form of a single bond or a series of bonds with different maturities (see laddering below).  This technique locks in the market gain, protects the principal into the future and can produce a steady interest income stream. The disadvantage is that this technique relies on your ability to time the market, which doesn't often work even for a savvy investor. If the price of your stocks continues to increase after selling your shares, you would have lost future increased value.

Laddering of Bond & CD Investments -- As stated earlier the disadvantage of bonds and CDs is that they require you to lock up investment funds at fixed interest rates.  The best way to counter both of these disadvantages is to purchase a series of bonds or CDs with different maturity dates and possibly different interest rates, a process called laddering.

To get the laddering process started, you need to make an initial purchase of at least two and preferably three to five bonds/CDs.  The first bond/CD should have a term of six months or one year with each additional bond/CD purchased having a term six months to a year longer than the previous one purchased.  This way every six months or every year (based on your purchases) you will have bonds/CDs maturing and paying you interest.  Every time a bond/CD matures, you have the option of purchasing another one or using the proceeds.  This also provides protection against fixed interest rates, since every six months to a year you will be purchasing bonds/CDs at current, and possibly more attractive, rates.

Laddered CD Example

Interest Total
Value
------ 2022 ------ ------ 2023 ------ ------ 2024 ------ ------ 2025 ------ ------ 2026 ------
Due
Date
Amount Due
Date
Amount Due
Date
Amount Due
Date
Amount Due
Date
Amount
CD #1 1.20% 6/18/22 $5,000
CD #2 1.50% 3/15/23 $10,000
CD #3 1.30% 2/25/24 $4,000
CD #4 1.75% 9/14/25 $8,000
CD #5 2.00% 6/12/26 $5,000
Average
Interest
1.55% $32,000 $5,000 $10,000 $4,000 $8,000 $5,000