Individual CDs, Bonds, Bond Funds and Stable Value Funds

Individual Certificates of Deposit (CDs) and Treasury bills/bonds are considered very low risk because they are usually backed by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and/or the US Government. 

CDs and 'Treasuries' offer a fixed interest rate for the term of the deposit and the amount deposited will be returned at maturity along with the interest earned. 

If you invest $10,000 in a CD at 5% for 12 months, you receive your initial investment (principal) of $10,000 and $500 interest back after 12 months = $10,500. 

Individual Corporate and Municipal Bonds are backed by the companies/municipalities issuing the debt. Assuming a default has not occurred, you get back 100% of your principal plus interest. 

No active management is required for Certificate of Deposit (CDs), Corporate, Municipal or Treasury bills/bonds = No ongoing management fees.

. 

. 

An individual CD/bond has a definite maturity date with a specified interest return, while a Bond Fund does not. 

Bond Funds are a type of mutual fund or exchange-traded fund (ETF) that invests in a diversified portfolio of bonds. Unlike individual bonds, Bond Funds do not have a fixed maturity date. Instead, they continuously buy and sell bonds to maintain the fund's strategy and objectives. 

Bond Funds come with management fees and other expenses that can erode returns over time. 

Bond Funds are subject to market risk, meaning their value can fluctuate with changes in the broader bond market. 

The income generated by Bond Funds can vary, especially if a fund invests in bonds with varying maturities or credit qualities = No guarantee of interest income 

If a Bond Fund invests in lower-rated bonds (high-yield or junk bonds), there's a higher risk of default, which can impact the fund's performance. 

When interest rates rise, bond prices generally fall, which can negatively affect a Bond Fund's value = No guarantee of return of principle.

. 

. 

Stable Value funds, often included in retirement plans such as 401(k)s, with no guarantee of return of principle or interest income from the federal government, usually have management, insurance and administrative fees, which are relatively higher than Bond Funds. 

The underlying investments, fees, and crediting rates may not be as clearly disclosed or understood as other investment options. 

Stable Value Funds can be complex and may lack transparency, as they typically report their value at "book value" rather than "market value" on client statements. The book value represents the principal amount invested plus accrued interest, which might differ from the market value, reflecting current market conditions.

Stable Value Funds citing book value can mask fluctuations in the underlying assets' market value, creating an impression of stability, but not necessarily the actual market fluctuations of the underlying securities. 

As the values on client statements reflect book value, there may be a lack of transparency about the actual performance and risks of the underlying investments.

The presentation of Stable Value Funds as always maintaining a level value can give investors a false sense of security, meaning they might not fully understand the risks involved, especially under extreme market conditions. 

Stable Value Funds invest in bonds and similar securities. The insurance contracts or investment agreements backing Stable Value Funds (Guaranteed Investment Contracts (GICs) and Synthetic GICs) carry the risk of default from the issuing insurance companies or financial institutions. 

Increased economic uncertainty or signs of an economic slowdown can force Stable Value Funds to reduce interest rates to maintain stability and liquidity. If the credit environment worsens, increasing default risks, Stable Value Funds might need to reduce interest rates to make up for undisclosed losses. 

The value of the underlying investments in Stable Value Funds can be affected by changes in overall interest rates. In a rising interest rate environment, the underlying bond values in Stable Value Funds likely fall, creating a wider gap between book value (what clients see) and market values (the actual worth of the underlying assets). 

As mismatches between book value (what clients see) and the market value (the actual worth of the underlying assets) can happen, and there is a need to liquidate assets if significant redemption requests occur, a fund might face challenges if market values are lower than the book value. 

If a Stable Value Fund experiences higher-than-expected withdrawals or redemption requests, it might need to hold more liquid, lower-yielding assets, leading to a reduction in the interest rate.

In times of financial stress or mass withdrawals, some funds might face liquidity issues which could potentially affect the ability to meet redemption requests, leading to restrictions on how and when money can be withdrawn. 

A Stable Value Fund can restrict or prevent a retirement plan sponsor from liquidating the fund under certain conditions. Some Stable Value Funds may impose fees or penalties for early or large redemptions to discourage retirement plan sponsors (Employers/Administrators/Trustees/Managers/Fiduciaries) from liquidating the fund prematurely. 

If a fund’s market value is below its book value, an imposed Market Value Adjustment can reduce payout amounts, discouraging large withdrawals by plan sponsors during times of market stress.