For the safest possible savings or investment choice, the options often narrow to a choice between bank certificates of deposit or U.S. Treasury notes. The features of the two investment types are different enough to make the choice of which is most appropriate important for your financial planning. There may be different times in your financial path where one or the other is more appropriate.
Treasury Note Features
Treasury notes are investment bonds sold by the U.S. Treasury and backed by the full taxing power if the federal government. Notes are issued with maturities of 2, 3, 5, 7 and 10 years. Interest is paid semiannually on notes at one-half the coupon rate designated on a specific note. The interest from a Treasury note will be paid into your bank or brokerage account. The price a Treasury note may be higher or lower than the face amount to bring the earned interest rate -- the yield to maturity -- in line with current market rates. Treasury notes can be purchased directly through an account on TreasuryDirect.gov or in the aftermarket through an investment broker.
Treasury Note Advantages
Treasury notes can be purchase in increments of $100, up to $1 million or more, all of which would be government guaranteed. The Treasury sells notes through an auction process and individual buyers get the same rates as large investment firms. Several different notes are auctioned each week, allowing you to buy the maturity length you want within a few weeks. The interest earned from Treasury notes is exempt from state income tax, increasing the after tax yield when compared to fully taxable interest paying investments. A Treasury note can be easily sold into the secondary market if you want to get the money before the note matures. It is possible to earn a profit from selling the note if interest rates have declined since you purchased the Treasury note.
Certificates of Deposit
Certificate of Deposit -- CDs -- are bank deposit accounts which earn a set rate of interest for a specific period of time. Available CD maturities typically range from one month out to five years. The minimum deposit amount for a CD is set by a bank and can be as high as $10,000. Some banks may offer CDs with longer terms. Certificate of Deposit balances up to $250,000 are FDIC insured. Each bank sets its own CD rates for different maturities based on how much a bank wants to compete for deposits.
A major advantage of CDs over Treasury notes is the ability to let interest compound in a CD. If you do not withdraw the interest from a certificate, the bank will compound the interest quarterly or daily, based on the terms of the certificate. Compound interest allows your account to grow more quickly. Since banks compete for deposits, you can shop around to find better interest rates, either from your local banks or via the Internet. A bank may attach special features to a certificate of deposit -- such as interest rate step ups or early withdrawal options -- which may be useful for your financial planning.