Certificates of deposit (CDs) are often popular with investors because, like bank accounts, they're insured. The other options discussed in this course are not.
Don't get too bogged down in the insurance issue, though. The types of boring bonds we talk about in this course rarely go belly up. For that to happen, the U.S. government and a host of blue-chip corporations would have to become insolvent. And if that happens, short-term investments may be the least of your worries.
The biggest benefit, however, is that a CD's return is predictable. It's guaranteed. Bond funds aren't that predictable. (A bond fund is less predictable because its return is composed of both income and changes in the prices of the bonds it owns.)
Timing is the biggest problem with CDs. A CD requires that you hold it for a set period. If you cash in sooner, be prepared for substantial early-withdrawal penalties. The penalties typically range from three to six months' worth of interest. But CDs can be great choices for investors who know exactly when they'll need their money.
Ultrashort-Bond Funds >>