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Floating-Rate Notes: A New, Much-Hyped Alternative to CDs

They pay about 1.5 percent, but floating-rate notes are not as safe as CDs or money-market accounts


It’s tough to squeeze much interest from a certificate of deposit or money-market account these days — the average CD yield is a measly 0.32 percent; money market returns aren't much higher. So you may be tempted to invest in the latest alternative: floating-rate notes, which currently pay about 1.5 percent.

Before you commit your cash, do some homework.

As Bloomberg Businessweek just reported, floating-rate notes are now being hawked by some of America’s biggest blue-chip corporations — such as General Electric, Ford and Caterpillar — through their websites.

The new notes typically require a minimum investment of $500 or $1,000 and look an awful lot like money-market bank accounts; most even come with limited check-writing privileges. But the big draw is that the interest rises if prevailing rates increase.

(MORE: Women Need to Get Serious About Emergency Savings)

However, there are a few important distinctions between floating-rate notes and traditional CDs and money-market accounts:
 
They’re not federally insured. Floating-rate notes are corporate debt securities — when you buy one, you’re trusting that the company will make its payments and won’t default. True, it’s unlikely that a giant corporation like GE will default, but the notes are not guaranteed.

Interest rates can move down as well as up. Typically, the rates are adjusted weekly and are tied to other interest-rate benchmarks.

There are fees. You might pay roughly $10 to $15 when you write checks or redeem the notes.

Unlike CDs, the notes do not have a maturity date. When you want to cash in your note, you sell it back to the issuer. Issuers, likewise, can redeem their notes at any time.

(MORE: Where to Earn More on Your Savings)
 
If you're intrigued by the notion of earning more interest, you might want to consider putting a little money into floating-rate notes — but don’t dump the bulk of your savings into them. The extra return isn’t worth the added risk.

If you’re looking for places to invest for income and are willing to give up the safety of FDIC insurance, I suggest buying the dividend-paying stocks of blue-chip companies. Some of these stocks now yield around 4.5 percent. For my money, the extra income from dividends makes the risk of stock-market volatility worthwhile for a portion of my savings.

Do you have a question about personal finances or the economy? PBS NewsHour economics and business correspondent Paul Solman will answer questions from Next Avenue visitors on our site and on pbsnewshour.org. Email us your question and we’ll pass it along.

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