Bonds and new issue CDs through Fidelity

[Kittynews]

Hello everyone! I'm new here and hoping to get some advice on bonds and actually buying new issue CDs in my 401K/IRA account.

I'm trying to understand how buying new issue CDs from Fidelity directly actually works with all this coupon discounts etc.

Also, bonds seem interesting...are returns guarenteed? I see the price of a bond go up over time, but not sure how that works in comparison to buying a stock.

I'm not planning to use the money for 5+ years, but would like to get something more than the measily 1% currently for my cash reserves in the account that has over 100K+

Here are some of the funds available as fee free 5 star (morning star) options.

FIBIX - Spartan Intermediate Treasury Bond Index Fund - Investor Class
FGOVX - Fidelity Government Income Fund
FGMNX - Fidelity Ginnie Mae Fund
FCSTX - Fidelity California Short-Intermediate Tax-Free Bond Fund
FLTMX - Fidelity Intermediate Municipal Income Fund
FHIGX - Fidelity Municipal Income Fund
FDMMX - Fidelity Massachusetts Municipal Income Fund
FTABX - Fidelity Tax-Free Bond Fund
FTFMX - Fidelity New York Municipal Income Fund
FLTMX - Fidelity Intermediate Municipal Income Fund

Thanks in advance for any suggestions as well!

[atomicrc11]

Basically a bond sort of works like a CD. You give them your principal and they pay you interest at set intervals. Then at the end of the term, you get our principal back....ideally.

The main difference is that it is not FDIC insured so you can lose principal. Although bond holders have a better chance at getting some principal back in a bankruptcy than stock holders so there is a bit less risk than stocks.

Also, bonds can be callable. This means that sometime during the term, the issuer can pay you back our principal and stop paying you interest. This generally costs the issuer a little more in interest due to the possibility of the bond not paying the whole term the purchaser bought the bond for.

Now, as for the bond funds, if you are purchasing them in a tax advantaged account such as an IRA, you would immediately stop considering tax free and municipal bond funds. The tax free fund is exempt from federal income tax and the municipal bonds all in one state, for example California, New York or Massachusetts are exempt from federal income tax and that state's income tax. These are best used in a taxable account.

Now, individual bonds, if held to maturity will be worth what you paid for them plus interest if the company remains health and doesn't call the bond. If you try to sell it on the secondary market before maturity, it may be worth more or less depending on which way interest rates go. You also will need to find a buyer. Usually when the interest rate goes up the value of the bond goes down because new bonds will have a higher yield.

Bond funds you can sell at any time. These also go up and down with interest rates but someone else does the buying and selling. You also have a good idea of what you can sell your shares for.

I don't know how much I've helped, maybe someone else can step in and fill in the blanks for CDs. I don't have much experience with those outside of a bank.

[amedvedovski]

When buying bonds, especially government bonds, be aware that we are in the low interest rates environment. It means that the next move for Federal reserve is to raise interest rates. It can happen this or next year. If this happens, for example, interest rates increased by 1%, then long bonds, for instance, can loose 5-8% in value. If you invest in bonds I would recommend buying bonds mutual funds: government & corporate. Also I would invest in mutual funds and/or ETFs that cover international bonds. So it will be hedging in case dollar loses value.

[Marc Prosser]

Bonds Versus CDs

Most people arbitrarily assume that a bond is going to pay more than a CD. In today's environment that is not necessarily true. For terms of less than 5 years, more often than not you will receive a higher rate of interest putting your money in a CD versus a high-rated corporate bonds.