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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 35932  
Subject: Re: CD Ladders vs Bonds vs Bond Funds Date: 4/24/2003 5:16 PM
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Obviously in the very short term, CD's might not lose capital while a bond fund could. But keep in mind, too, that the same scenario in which interest rates rise and cause bond funds to dcline also would most likely coincide with higher inflation and a decline in purchasing power, so even the "safe" return on the CD's might be less than one might otherwise think strictly by looking at the % return.


If inflation gets high, obviously CD interest may not keep up (which is the point of laddering, so you can renew CDs at higher interest). But the CD ladder will still do better than the bond fund, because even though the interest of the bonds in the fund goes up, unlike the CD, the capital loss more than makes up the difference. Try cruching the numbers with any durations on funds and any change in basis points: if you can get a CD for the same current interest rate as a fund for the same maturity/average duration, the only way the fund will do better is if interest rates go down.

It would be worth looking back a couple of years to see if CDs had lower yields than equivalent treasury funds. Of course, when interest rates were higher, there was a much better chance of interest rates going down than there is now, so even if the CD rate was higher, the bond find might have been the better bet, thanks to the possibility of a capital gain.
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