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I'm seriously considering starting a bond/cd 5 year ladder.
Question is: Why would you consider using T-Notes at all vs
a FDIC insured company CD? 5 Year CDs are around 4.5 -4.8% (ING)
vs only 3.348% for the last T Note auction.
Anyone have better instruments to build a ladder?
Thanks,
Jim
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FlaBuckeye asks,

I'm seriously considering starting a bond/cd 5 year ladder.
Question is: Why would you consider using T-Notes at all vs
a FDIC insured company CD? 5 Year CDs are around 4.5 -4.8% (ING)
vs only 3.348% for the last T Note auction.


I agree. I haven't bought a Treasury note for my bond ladder in over 3 years. It's almost all CDs now.

Anyone have better instruments to build a ladder?


You might consider TIPS or I-bonds. Anything else will have more credit risk than an FDIC-insured CD.

intercst
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Hello,

While it's quite "Doable" I think that laddering is a pain in the neck. So my suggestion is to figure out about what average maturity you want to maintain and then get into a short term and an intermediate term bond fund(s) in the appropriate ratio. If you do this use that bond funds "duration" as opposed to their average maturity.

The type of bond fund is up to you. I'm concentrated mostly in treasuries because Ben said that's where to go.

Also consider the your relative tax bracket and the tax impact on your interest.

Good Luck,
pl
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<<While it's quite "Doable" I think that laddering is a pain in the neck. So my suggestion is to figure out about what average maturity you want to maintain and then get into a short term and an intermediate term bond fund(s) in the appropriate ratio. If you do this use that bond funds "duration" as opposed to their average maturity.>>


Please be aware that holding individual bonds or CDs is quite different from holding bond funds.

If interest rates rise, the Net Asset Value of each share of the bond fund will drop. This will reduce the Total Yield (which is the sum of the NAV and the interest income).

A rise in interest rates will not affect the yield to maturity of a bond or CD, if the security is held to its maturity. Usually, when a person constructs a ladder of bonds, the intent is to hold each to its maturity.

Since interest rates are currently at a 40-year low (Federal Funds Rate of 1.75%), there is more risk that they will rise than probability that they will fall significantly.

Therefore, a ladder of insured CDs and/ or TIPS or I-Bonds is the lowest-risk strategy.

Be aware that income tax must be paid annually on the interest from TIPS, but NOT on the interest from I-Bonds. No tax is owed on I-Bonds, until they are cashed in, which may be up to 30 years, at the discretion of the holder.

Wendy
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