Question

In a two paragraph summary please compare and contrast the financial aspects of government bonds vs. CD's. (maturity, interest rates, penalties, fees)

Answer 1

Government bonds are available for all maturities including very short-term, short-term, medium-term and long-term, i.e. for a few days to 30 years or more. CDs are usually available for a minimum of one year and upto ten years maturity. However, some banks do offer CDs for short term maturities (less than one year).

Interest rates on government bonds are considered risk-free interest rates as the bonds are backed by the government. Hence, the interest rates on government bonds will be lower than the rates offer by CDs (CDs are issued by commercial banks). For both government bonds and CDs, interest rates are higher for longer maturities than shorter maturities.

Government bonds can be bought and sold anytime in the financial market by investors. Hence there is no penalty or fee associated with them. However, brokerage or commission may be payable by investor when buying or selling these bonds. With CDs, there is usually a penalty or fee for withdrawing the deposit before the specified maturity. There may also be a fee charged by the broker who is the intermediary between the investor and the bank issuing the CD.