- There are two main types of investments: equity and fixed income. Equity refers to investments in the stock market. Equity investments compensate shareholders with dividends and/or share price appreciation; however, as shareholders are considered owners in the company, neither payment is guaranteed. Bonds operate a little differently. Bondholders are considered creditors and the company is therefore obligated to make interest payments whether it is profitable or not.
- CDs and Treasury bonds are two forms of fixed income products. Investors in these products are entitled to a payment in the form of interest from the issuer of the CD or the U.S. government. Since Treasury bonds are issued by the U.S. government, they are considered to be one of the safest securities on the market. Therefore, the rate of interest paid to investors is lower than comparable CDs issued by banks not affiliated with the government.
- Investors can obtain equal terms on both Treasury bonds and CDs. A term is the length of time the investor must hold the security. Some CDs have a three-month term, whereas others have a 30-year term. Treasury bonds with a term of one year or less are referred to as Treasury bills, however, they function the same. In general, the longer you can commit to invest funds with either the CD or the Treasury bond, the higher the interest rate paid.
- The process of purchasing a CD or Treasury bond can help you better understand what kind of securities they are. The more money you have to invest and the longer you commit to invest funds, the higher the rate of interest you will be paid on CDs. The investor makes a deposit with the bank for a certain amount and is then issued the CD, which confirms the deposit amount as well as the rate of interest paid and when. Treasury bonds are issued the same way, however, they pay the same rate of interest regardless of the invested amount.
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