Certificates of Deposit (CDs)
Many investors buy CDs because they don’t understand bonds, They think that CDs are a “safe” alternative because they are insured by the FDIC, an agency of the U.S. Government. CDs are considered relatively safe, as are the bonds issued by other Government Agencies like the Federal Farm Credit Bank, Federal Home Loan Bank, Sallie Mae, etc. But CDs, have restrictions on the amount you can purchase, have restrictions on early redemptions, and may include penalties! Government Agency Bonds which are of equal credit quality to the FDIC do not have any restrictions. Sell all or a piece of the bond before maturity if you like! Of course, the sale will be at current market value, which may be more or less than you paid. “Agencies” are extremely liquid, or marketable, with billions of dollars of them traded each day. There are even a few Agencies like Ginnie Mae, that carry the full faith and credit of the U.S. government… just like Treasury bills, notes, and bonds. And many government bonds may have higher yields than CDs! So before you buy a CD, you may want to consider Agencies, because you may be able to get a bond with similar credit-worthiness, greater liquidity, no restrictions or penalties, and possibly higher yields! Keeping in mind, of course, that CDs are FDIC insured and may provide fixed yields, whereas principal and yield on agencies will fluctuate with changes in market conditions and may not be insured.