FANOFJESUS
Thinks s/he gets paid by the post
A local credit union is offering a five year CD at 6 percent is this a good deal and would you do it? Or would you take a 3 year CD at 5 percent? Which is the better deal?
I think three months instrest.
I'd be concerned with inflation over a 5yr period. Bill Gross has mentioned staying short because of inflation concerns which are, of course, only visible in retrospect. Right now the present concern is disinflation but only a few months ago it was inflation (remember the high oil prices?). Personally for 5yrs I'd buy TIPS.
Would not the CD's be better than TIPS if, like you say, we are in a (possibly long-term) deflationary (disinflation) period. TIPS are governed by the official CPI rate of inflation, which has been 3.4% over the past 5 years, (and TIPS would, I think, be impacted by deflation, i.e., could actually have negative growth). The CD, at 5%, would have provided an assumed 1.6% of real growth over the past 5 years.
I know what happens to the CD if future CPI is negative (deflation) it just pays the initial rate to maturity, while the TIPS pays initial base rate (currently about 0) plus the CPI based inflation rate (averaging 3.4% over the the past 5 years). I realize that the past rate has nothing to do with future CPI rates but, if it is deflationary, (assuming this for the sake of argument) the TIPS would pay 0, would it not (at least considerably less than the CD rate which is LOCKED to maturity)?
Because you want inflation protection. With nominal fixed income [like CDs] you're betting that there will be low inflation or deflation. With TIPS, you're hedging. If the CPI-U goes up, my expenses will likely go up. And if the CPI-U goes down, my expenses will likely go down. Of course, as CFB has pointed out numerous times, your personal rate of inflation is different, and sometimes much different than the CPI-U.I have owned TIPS in the past (and have nothing against them at all, just trying to answer OP's question) but if I can get 6% FDIC (I can get 5.5% today) for the next 7 to 10 years why would I buy tips?
Nope. The individual bonds pay their coupons every six months, and the mutual funds [at least Vanguard's] pays distributions quarterly.Can you receive TIPS interest monthly like you can on some CD's?
if the CPI-U goes down, my expenses will likely go down.
As a comparison, the 1/15/2014 (about 5.2 yrs out) TIPS is at 3.54%. Not too shabby either ... and there is that inflation protection component....
I must say though, getting 6% CD for 5 years seems like a pretty sweet deal.