CD Definition

• A CD is issued by a bank. Annual yield for a certain time period (1 year, 5 years, etc.) is agreed upon when buying a CD.
  
  

CD Financing

• Banks pay interest out of private operations. Profitable and risky investments by banking professionals generate a gross profit out of which CD holders are paid their appropriate rates of return.
  
  

Government Bond Defined

• Government bonds are issued by federal, state, or local (municipal) agencies. Defaults on government bonds are unlikely but, especially at municipal levels, fully possible.
  
  

Government Bond Types

• Treasury bonds are viewed as the safest of these options. Treasury Inflation-Protected Securities (TIPS) promise a---barely---positive post-inflation yield even if inflation skyrockets after a bond is purchased. Municipal bonds offer tax-free interest for local residents.
  
  

Interest Rate Effect

• Government bonds and CDs respond similarly to interest rate changes. Price goes down and yield increases when interest rates are high, with the effect larger as bond/CD duration increases.