Types of Cash Investments & Bond Products

by Alexis A. on 2010-07-140

When we talk about investment products, we often mean stocks, options and mutual funds, which many people consider use to fuel their longer term goals. But a portfolio shouldn’t be without some type of representation in the more conservative assets that are responsible for providing stability and balance to your holdings. So while it’s not the most sexy thing on earth, let’s do a short primer on those investments that can help save your skin during a rocky economic period or volatile year in the markets.

Certificates of Deposit or CDs

Certificates of deposit can be thought of as a reverse loan. You, as the investor, are loaning your bank a specified amount of money for a specified amount of time. The money you earn on your loan is the interest rate you are charging your bank for the use of your money.

CDs are a great way to sock some money away for a rainy day if you are in a place to leave your money in the hands of the bank for an extended amount of time. There are some penalties that are levied against you in the event you withdraw your money before the CD matures. There are a couple of types of CDs that you can invest in. Let’s take a quick look at these.

1. Brokered CDs: A brokered CD works just like a CD that is issued directly from the bank with the exception that a broker can buy or sell the CD for you. What’s really nice about these is that they are covered by the FDIC, meaning that if for some reason the bank is unable to pay you your money at the maturity date, then the government will. This is a risk free investment as long as the amount of money you invest is under the FDIC guarantee.

2. Jumbo CDs: Jumbo CDs are just like regular CDs with the exception that the minimum buy in is $100,000 and you can’t buy these from a broker. Jumbo CDs are only available through the banks that offer them.

3. Long Term CDs: These CDs usually have the highest interest rate out of all the CD products available on the market today. But the reason is because the maturity date for these products is 20 years or more. They make really great retirement investments, but if you need to withdraw the money before the maturity date, be prepared. It’s going to cost you.

A Look At Bonds

Bonds are probably one of the best known investment products on the market today. Almost everyone has received a savings bond at some point in their lives. While those bonds were backed by the federal government, companies also sell bonds. A bond is a certificate that is issued by a company, or the government, when they need an influx of cash. The bond allows the holder to “purchase” the certificate which, in essence, loans money to the bond issuer in exchange for a repayment plus interest at a specified date in the future.

There are a couple of types of bonds you can purchase. These include treasury bonds, municipal bonds, agency bonds and corporate bonds.

1. Treasury bonds: Treasury bonds are the bonds that most people identify with. These are the ones that are issued by the government when they need an influx of cash and don’t want to raise taxes. Treasury bonds are also known as savings bonds and are generally a very safe investment as they are backed by “the full faith and credit of the United States”.

2. Municipal bonds: Municipal bonds are like treasury bonds, except that they are issued by local municipalities like states or cities rather than by the federal government. They work in the exact same manner. The investor buys the bond and in essence, loans money to the municipality that issues the bond in exchange for repayment with interest at a later date. These are somewhat riskier than treasury bonds in that it is easier for a state or city to find themselves in a bankrupt state before the federal government would.

3. Agency Bonds: These bonds are somewhat different in nature with regards to who issues them, but they’re not different in their form or function. Agencies like Ginny Mae, Freddie Mac, Fannie Mae and a host of other agencies can issue bonds in order to raise money. Regardless of whether or not the agency is backed by the federal government, their bonds are not. These are somewhat riskier than treasury bonds or municipal bonds in that the bond is backed by an individual agency; however the interest rate or rate of return on the investment is generally higher.

4. Corporate Bonds: Individual corporations also have the need to generate cash and can issue bonds in order to do so. Because corporations are extremely varied in size, financial condition, and industry type, the risk associated with purchasing corporate bonds is also extremely variable. Because these bonds are more risky than other types of bonds, the rate of return is generally the best.

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