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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35397  
Subject: Re: Advice for Mom Date: 5/3/2002 11:17 AM
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A CD ladder is a way of hedging on interest rates, since you can roll over in a year, 2 years, etc. If you wait 6 months, you're getting money market rates until then, so rates would have to go up enough to make the wait worthwhile. I seriously doubt we'll see any significant rise in CD rates in the near term (the 5-year at my credit union went from 4.75APY to 5.5APY between January and March and has, so far, stuck there: I'm more inclined to think it will go down, for a while, rather than up, in the next few months).

It does sound like she'll have to sell the bonds. I'd do some arithmetic. See if she can sell now for a premium. If she can, then figure out what would happen if you sell at a premium and put the money into CDs, compared to keeping the bonds for a few years and selling at break even, 5% loss, 10% loss, 20% loss. Long term rates may not go up as soon as short term rates, but they will go up, and with those durations, even a small rise in rates spells trouble (multiply duration by change in basis points: a 20-year bond at 7% would be sell at a 10% discount if new long term bonds were offerring 7.5%). If selling at a premium now and putting the money in CDs is anywhere close to keeping the bonds and selling at par, I'd get out.

As upset as we all should be at the awful advice your mother was given, I'll say one positive for this bear market. It has forced those of us with a few years left till retirement to plan accordingly.
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