5

In looking at my brokerage account for fixed income products, I was looking at both CDs and Corporate Bonds. I was surprised to see that the best 1-year CDs had a higher interest rate than any AAA or AA bonds. (A was slightly higher than the best 1-year CDs).

Why would somebody buy a corporate bond with a lower interest rate over a CD that is FDIC insured?

My money would be locked up in both, but I could sell both on the secondary market if I needed the money early. I'm guessing it's easier to find buyers for a corporate bond on the secondary market, so I could probably get a better price. Could that be a reason why these bond rates are slightly lower?

Improve this question
2
  • 2
    Consider that FDIC insurance has a $250,000 limit. For institutional investors and businesses (even small businesses), investments will easily exceed this limit. Therefore, the financial soundness of the bank will be a real factor.
    – user71659
    Mar 19, 2018 at 17:57
  • 1
    Were the bonds priced at par (100)? I would guess that even a AAA bond issued at 2 or 3 percent would currently trade at a decent discount.
    – D Stanley
    Aug 31, 2018 at 1:27

1 Answer 1

Reset to default
2

The investor might choose the bond if it is more liquid (easier/cheaper/quicker to sell) or if the amount they wish to invest is more than the FDIC limit.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .