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.
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CD Definition
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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.
CD Financing
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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.
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Government Bond Defined
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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
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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
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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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