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Bob,

Everyone’s situation is different. So what I’m about to say can and should be ignored if it doesn’t interest/apply to you. But if I were you, I’d take a portion of the $250k and shop the corporate bond market.

If you’re willing to buy CDs, then it has to be inferred that current-yield is more important to you than eventual cap-gains. Here’s a bond situation you might want to consider. Currently, there are 4 (1/1) of Ford Motors’ 7.7’s of ’97 being offered at 74.500 for a YTM of 10.335%. At that price and that yield, this is definitely a risky bond, fully deserving its junk-bond rating of Caa1/CCC. Off the top of my head, if I’m remembering right, the 5-year default rate for triple-CCCs is in the neighborhood of 13%. That’s not a minor risk. But let’s degrade that rate even further by bumping it up one Fib notch to a default rate of 21%. Let’s also ignore the YTM, which you won’t be around to collect on, and focus on current-yield, which is an attractive 10.441%. (Had the bond been bought when it really should have earlier in the year, the CY and TM would have been a multiple of that. But that’s neither here nor there, because yesterday’s markets can’t be bought.)

To buy ultra, long-dated bonds is to annuitize your money. You put up the purchase price and, hopefully, buy an income-stream for the life of the bond, at which time your principal is returned. Due to the ravages of inflation, the principal won’t be worth much, but the fact of buying at a steep discount helps to take some of the string out of that loss. Meanwhile, from the getgo, you’re receiving a fat income-stream whose effective purchasing power will gradually decline/increase in direct proportion to inflation/deflation.

The fly in the ointment is that income-stream isn’t guaranteed in any way. In fact, it will cease if the issuer defaults. So the game becomes that of gaming the issuer. If the day after the bond is bought, the issuer defaults, then recovery of capital-at-risk will depend on the workout-price offered to note-holders. In Ford’s case, the assumption has to be that the workout won’t be insignificant, and that it most likely will be a debt-for-equity swap. So, if Ford files Chapter 11 on you, you end up owning some expensive shares of their common. Big whoop. I can think of worse fates.

If Ford delays filing Ch 11, how long will it be before you’ve recovered your capital? Just under eight years, right? All coupons received after that are gravy, making the bond the better purchase than a CD in X number more years. (I’m too lazy to do the math, but plotting it out in Excel is straight-forward.)

If Ford never files, then you’ve got a killer income-stream.

But let’s guess that Ford files in accordance with historical default-rates. How many of these a manifestly risky situations offering a 10% CY would have to fail on you before buying the safe, but low-yielding CD would have been the smarter buy? That’s the junk bond game. Yes, you’re going to suffer losses. But if gains, on average and over the long haul, across a diachronically, statistically-significant sample, are much bigger than losses --and much bigger than always playing it “safe”-- than why not allocate a portion of one’s capital to such situations?

I haven’t run the numbers, and you might well not being interested in doing so, either. But such opportunities do exist.
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