Bucky wrote:
- quote -

Interest rates are NOT at an all-time low, as I explained in another
message.

Bonds are issued in maturities up to 20 and 30 years, and historically
there has been a risk premium for bearing interest rate risk. CD's are
most often issued with maturities of 1-5 years. I doubt there would be
much difference historically between the returns of bonds and CD's of
similar maturities.

Robert Ricks wrote:
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I think that the experts are assuming in general, not right now when
interest rates are at an all time low. I think historically, bond
returns are around 7-8%. I'm not sure what historical CD returns are,
but let's say 5-6%.

Also, they're going to compare typical bond rates to typical CD rates.
They're not taking the highest bankrate.com rate to compare to a
typical bond rate.

I'm also assuming that you have to open a new account at each bank that
you find at bankrate.com. So it can get pretty cumbersome after a while
if you've got a dozen CDs opened at different banks.

That said, I think it's reasonable to substitute CDs for bonds if the
yields are within 0.5% or so.

I'm not quite sure what you're saying below. A few related observations:

1.
Investment grade bond and CD rates, for the same maturity, are pretty
close. Bonds tend to have a higher yield, but not by much, and not always.
Investment grade bonds are a bit more risky than (FDIC-insured) CDs, thus
the higher yield.

2.
Generally the advice I see is to have both CDs and investment grade bonds.
I don't see a clear preference for investment grade bonds. The two really
are pretty competitive.

3.
You talk about your value disappearing as rates rise. But this is only if
you don't plan to hold the bond to maturity. You're only buying two-year
CDs, right? Would two-year bonds *held to maturity* not give you enough
flexibility?

4.
Re the risk of bonds: I refer to
http://www.blaha.net/Finance%20Corpo...%20Ratings.htm for an idea
of default rates of bond issuers. Notice that from 1970 to 2001, the lowest
rated investment grade bond defaulted (within a year of issue) 0.15% of the
time. That's less than 2 times out of 1000. For higher grade bonds, the
default rate is even lower. History is no guarantee of future performance,
but this info is better than nothing.

I can see how the fact that even some high grade bonds default might be
troubling. But I for one think the risk is low enough to have at least a
"small percentage" of high grade corporate bonds in my income portfolio,
along with some CDs.

"Robert Ricks" <stevericks[at]mindspring.com> wrote
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======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding.

Robert Ricks wrote:
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I agree that 5 year CD's have very little credit risk, if you are under
the FDIC insurance limits. An advantage of Treasury bonds is that there
is a liquid market for them, so you can sell them at any time, possibly
with a capital loss. OTOH, many bank CD's can be redeemed for the
principal, at the cost of a few months interest. Thus they come with a
"put" attached, which is a good thing for the investor. Interest on
bank CD's is taxable at the state and local level, but T-bond interest
is not.

Exactly, my point. I can do better than that on a 5 year CD which carries
no risk. So why would I buy something that gives me less money considering
everything else is even? I'm still having trouble understanding why bonds
would be needed as long as CDs are providing the ballast..
Steve

PS -Sorry for the spellings -that was also "of course" -not "of curse on
bonds" --well, maybe the latter is more accurate

<beliavsky[at]aol.com> wrote in message
news:1104672174.334569.260070[at]c13g2000cwb.googlegroups.com...
- quote -

- quote -

The yield of 10-year bonds does seem low to me, but it is substantially
higher than its all-time low. According to
http://finance.yahoo.com/q/hp?s=%5ET...e=2&f=2005&g=m
, a 10-year yield of 3.35% occurred in May 2003, and it is currently at
4.22% .

"Scenario", not "senerio".

My question is, considering the current interest rates, could CD's be a
rational substitute for bonds? Please feel free to enlighten my logic.
I maintain a percent of my portfolio in stock funds and the remainder in
CDs. For some reason, I have never been able to bring myself into seeing
the reason for bonds.
I consider myself fairly conservative - 50 years old. In stock mutuals I
have the typical large/mid/small funds with growth and value --and an
international fund. I expect some ups and downs with the stock side, and
consider it as the "risky" part of my portfolio. The remainder of my money
I keep in CD's laddered out two years-I consider it the 100% safe side that
provides some balast to my overall portflio. By using bankrate to find
highest yields, I can get 3.6 apy on 2 years, 3.34 on 1 year CD's, which are
100% safe. (Worst case senario, an emergency happens, I loose 6 months
interest.)

All the advice one reads would recommends I buy bonds instead of CDs. With
bond rates at an all time low, mathematically, there is about only one way
bonds can go(of curse they could remain the same), and it ain't up. If
rates rise, the most likely senereo, my value disappears. Even, if aggainst
all odds, rates dropped a little (there isn't really much rooom left for
them to go down) so what would the extra 1/4 or 1/2 point do for me? And,
with the exception of Treasuries, bands are not 100% safe.

I would appreciate some real figures to convience me I should be in bands.
Oh, probably should add that I did buy an I bond --view it about like a
CD -100% safe, returns about the same as a CD, other than you must hold it
for 1 year. Its return will vary if held, but it is "safe" ---cost of
living plus current rate.

Thanks in advance for advice.

Steve