5 ms·
I'm kind of an idiot with anything terribly elaborate in the financial world, so forgive a bit of a dumb question: what are the downsides to bonds instead of us
by tombert 5y ago
I'm kind of an idiot with anything terribly elaborate in the financial world, so forgive a bit of a dumb question: what are the downsides to bonds instead of using something like a CD?
- johng 5y agoThe bond usually has a much lower yield because it is safer.
- bluedevil2k 5y agoWhat? This isn’t correct, bonds have higher yields than CDs.
- deleted 5y ago[deleted]
- skizm 5y agoNo access to your money for a fixed period of time and usually (much) lower returns than if you just invested in a broad market mutual fund / ETF.
- benmanns 5y agoI bonds in particular cannot be cashed out before 12 months, and before 5 years there is a penalty. Bonds are not covered by FDIC insurance and can default (though less relevant for US Treasury bonds which can print USD and more relevant for corporate/foreign bonds).
- ballenf 5y agoWhat stops you selling them to someone else?
- jaywalk 5y agoThey're issued to you, and have your name on them.
- benmanns 5y agoI bonds in particular are closer to a CD and are not transferable. If you have access to credit, you could borrow and pay it back once your I bond matures is cashable. Other Treasury notes can be sold, though if rates go up you may get back less than your principal, particularly on the longer duration notes.
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- rajup 5y agoTreasury rules? No redeeming for 1 year, and redeeming before 5 years means you lose the last 3 months of interest. You can gift them to other people though.
- edge17 5y agoNothing, you can buy and sell them in the secondary market.
- deleted 5y ago[deleted]
- codegeek 5y agoBonds are not guaranteed like CDs. Bonds can fail. You could lose your investment. Even though they are a lot more safer than stocks, but they are still a risky investment compared to CDs.
- loeg 5y agoNot really relevant for Treasury bonds. They’ve guaranteed with the full faith and credit of USG. If that fails, FDIC already failed.
- dekoruotas 5y agoIf you manage to borrow 10k from somewhere else at 3% APR and invest here you're getting 410 risk free. Unfortunately it is capped at 10k...
- driverdan 5y agoIt's not risk free because the interest rate is re-adjusted every six months. If inflation drops back below 3% before the withdrawal penalty period expires you'd be in the negative.
- Raidion 5y agoI'm not an expert either, but the two differences that come to mind are: CDs are FDIC insured, bonds aren't. This doesn't make a big difference when we're talking government bonds, but you can lose your shirt on a regular corporate/muni bond. You'll always get CD money back (subject to 250k FDIC limit) Bonds also are also an asset that fluctuates in price: A bond can be sold at a price different from it's face value. This means that if interest rates rise, you're going to not be able to sell the bond for the same price you've bought it for. This is because you need to make up for the lower interest rate. CDs are just basically a loan on cash. Bonds are an asset (not cash!) that pays interest.
- Spooky23 5y agoNo, those arguments are not a factor. FDIC insurance is backed by the US Government. US Saving Bonds are backed by… the US government. They can be redeemed at any time, subject to certain constraints. They are not tradable bonds — a TIPS bond would be the US government instrument that is tradable and inflation protected.
- dragontamer 5y ago> I'm kind of an idiot with anything terribly elaborate in the financial world, so forgive a bit of a dumb question: what are the downsides to bonds instead of using something like a CD? CDs, TIPS (Treasury Inflation Protected Securities), MBS (Mortgage Backed Securities), Munis, Corporates... these are all so called "debt instruments". Your question is roughly equivalent to "What is the downsides to investing into Stocks instead of AAPL??" Well... sometimes AAPL goes up, sometimes it goes down. Stocks are... well... AAPL -IS- a stock. Similarly, CDs are typically a specific kind of bond: the type you get from a bank. But banks also sell traditional bonds. -------------- The main benefits of CDs is that they're (usually, but not always) FDIC insured. So if the bank goes bankrupt, the US Government steps in and will give you your money back. The main benefits of "bonds" (which are a very, very broad category consisting of literally thousands, maybe millions of different things)... is that typical bonds can be sold on the open market. That means that if the interest rates go down, you can sell bonds at a higher price. (Look, I have a 5% bond, and all you suckers are stuck getting 0.5%. Feel like trading? I'll sell you my $10,000 5% bond to you for $11,000.) Of course, if interest rates go up, then bonds lose value. (Shoot, I have a 0.1% bond and everyone else has 0.5% bonds. I don't want to be stuck with this anymore, feel like buying this $10,000 bond off of me for $8500?)
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- dangle1 5y agoThis is a pretty limited tool, but in the last year it's caught the attention of people dismayed by low CD and savings account rates. In that context, the argument is that this can be a good place to keep an emergency fund, provided one has enough emergency cash in other places to bridge the first year before the I Bond can be first redeemed. The withdrawal penalty between years 1-5 is 3 months of interest, so not terrible if being withdrawn in an emergency. No one's getting rich off this instrument, but it could be a good low hanging fruit option for some.
- Spooky23 5y agoNothing other than the fixed yield on savings bonds has been lousy for the last 15-20 years. It’s backed by the full faith and credit of the US government and interest isn’t taxed until redemption, so it’s probably the safest/simplest investment for a retail saver that’s out there.