THE BEECHMONT CREST ONLINE GUIDE TO STOCKS AND INVESTING
Overview of Fixed-Income Investments
- Have a contractually fixed payment schedule
- A fixed income investment represents a loan from the investor to the firm that issues investment instrument
Savings Accounts
- Is a loan from the investor to a bank or savings and loan association (S&L)
- Highly liquid and low-risk (almost all savings accounts are federally insured)
- While safe, rates of return are generally low
Certificates of Deposit (CDs)
- Requires a substantial initial investment (usually a minimum of $500 ~ $1000). The investor will also have to give up some liquidity, as CDs have fixed durations of 3, 6, 12, or 24 months)
- Rates of return on CDs are higher than those of savings accounts. Moreover, the rate of return increases as the investment amount and duration of the CD increases.
- An investor who cashes in a CD before its maturity date will have to accept a significantly lower return on her investment. (This is the “penalty” for cashing in the CD before the maturity date.)
Money Market Certificates
- Issued by banks and S&Ls to compete with U.S. Treasury bills (T-bills)
- Require a minimum investment of $2,500 ~ $10,000. The minimum duration of a money market certificate is usually six months.
- The rate of return fluctuates according to the rate of return on T-bills. Money market certificates are pegged at premium above the T-bill rate.