CD Vs. Government Bonds
Certificates of deposit (CDs) and government bonds are two types of low-risk investment vehicles. CDs are defined and financed by their relationship to a private bank.
Government bonds are issued by state institutions, funded with public funds, and come in several varieties. Both investments respond similarly to interest rate changes due to being fixed-income bonds.
A CD is issued by a bank. Annual yield for a certain time period (1 year, 5 years, etc.) is agreed upon when buying a CD.
Banks pay interest out of private operations. Profitable and risky investments by banking professionals generate a gross profit out of which CD holders are paid their appropriate rates of return.
Government Bond Defined
Government bonds are issued by federal, state, or local (municipal) agencies. Defaults on government bonds are unlikely but, especially at municipal levels, fully possible.
Government Bond Types
Treasury bonds are viewed as the safest of these options. Treasury Inflation-Protected Securities (TIPS) promise a—barely—positive post-inflation yield even if inflation skyrockets after a bond is purchased. Municipal bonds offer tax-free interest for local residents.
Interest Rate Effect
Government bonds and CDs respond similarly to interest rate changes. Price goes down and yield increases when interest rates are high, with the effect larger as bond/CD duration increases.
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