Are you new to the world of investing and looking for low-risk options? When it comes to fixed-income investments, Treasury bills and certificates of deposit are two popular choices worth considering. In this article, we’ll break down the complexities of each investment type, helping you understand the differences and make an informed decision that suits your needs.
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Let’s start with Treasury bills (T-bills). These are short-term U.S. government debt securities with maturity dates of up to one year. T-bills are known for their low-risk nature and can be purchased through platforms like TreasuryDirect or on user-friendly investment apps such as Public.com.
Here’s how T-bills work: As an investor, you decide how much money you want to invest (in multiples of $100) and choose the maturity length. At the end of the selected period, you receive the face value of the T-bill along with the accrued interest income. For example, if you invest $4,000 in a 26-week T-bill with a fixed interest rate of 5%, you would receive $4,000 upon maturity.
Now, let’s explore certificates of deposit (CDs). CDs allow you to earn interest on a lump sum of money when you hold the investment until maturity. These are commonly offered by banks and credit unions, and brokered CDs are available through brokerage platforms. With CDs, you have the flexibility to choose maturity lengths ranging from a few months to several years.
Here’s an example of how CDs work: Let’s say you decide to purchase a six-month CD with an annual percentage yield (APY) of 5.0%. After selecting a bank and product, you make a deposit of $4,000 (the deposit requirement may vary depending on the institution and product). Once the six-month period elapses, your CD matures, and you receive the principal amount along with the additional 5.0% interest, totaling $4,098.
When comparing Treasury bills and CDs, it’s important to note that both offer relatively high liquidity compared to many stock market investments. Liquidity refers to the ease of converting an investment into cash.
In conclusion, whichever investment option you choose, keep your investment objectives in mind and familiarize yourself with the nuances of Treasury bills and certificates of deposit. Whether you decide to invest in T-bills through TreasuryDirect or a Public Treasury account, or opt for CDs, understanding the implications will help you work towards your financial goals with confidence and without unnecessary stress.