Various investments are used to diversify your investment portfolio and to implement your financial plan. It is important to understand your investment choices as well as their role in your financial plan. The following several pages highlight the various major investment categories.

GUARANTEED INVESTMENTS

Generally, guaranteed investments are a good place to put money for the short term, if, for instance, you plan to use the money to make a large purchase in the near future. Common guaranteed investments include money market accounts, passbook accounts, certificates of deposit and treasury bills.

MONEY MARKET ACCOUNT

Money market accounts pay an adjustable interest rate. The funds are readily available all the time without penalty. The FDIC generally insures money market funds but you must check in each case to be sure.

PASSBOOK ACCOUNT

Like the money market account, this account also pays an adjustable interest rate and the funds are readily available without penalty. The interest rate is generally lower but more stable than a money market account interest rate.

CERTIFICATE OF DEPOSIT ( CD )

A certificate of deposit is a fixed amount invested at a fixed interest rate for a fixed period of time, e.g., 6% annually for 2 years. The funds are not liquid; that is, they are not readily available to you. In exchange for “giving up” ready access to the funds, the interest rate is usually higher than for a money market account. If you liquidate a CD before its maturity date, there will likely be an interest penalty. CD interest rates are more predictable than money market and passbook account interest rates because the rate is fixed at the time you invest. CD deposits also are usually FDIC insured.

TREASURY BILL

A treasury bill is a short-term obligation of the United States government, paying a fixed interest rate for a fixed period of time. Treasury bills are often thought to be very safe investments because they are backed by the full faith and credit of the United States government. These fixed income securities have maturities ranging from 30 to 365 days and are free from state income tax.

BONDS

A bond is an “IOU” generated when an investor lends money to the bond issuer. Bonds pay a fixed interest rate and have a fixed maturity date. Bonds are generally low-risk, stable investments that return steady income. Bonds are issued by various companies, or by federal, state and local branches of government. Bonds generally mature anywhere from ten to thirty years from the date of issue. A Note ranges in maturity from one year to ten years. By investing in a bond or note, you receive a fixed interest rate and the return of your original investment (principal). The interest on most state and local government bonds is tax-free. However, the interest rate paid on such “municipal bonds” is generally lower than that available on corporate bonds and other guaranteed investments such as CDs. Generally, the higher your marginal income tax rate, the more attractive tax-free bonds will be.

There are a number of risks in buying bonds. First, the company issuing the bond could experience a financial hardship that would jeopardize repayment of the bond interest or even the principal. Secondly, as interest rates rise, the value of your bond decreases. However, the reverse is also true, with bond values increasing as interest rates decline. Companies with questionable credit that must offer a higher rate of interest to attract investors issue high-yield or “junk” bonds. Such bonds pose a substantial risk of default. The length of time until maturity of the bond is an important factor. The longer the maturity, the greater the influence of changing interest rates on the value of the bond. Much like stock mutual funds (see below), bond mutual funds offer a diverse portfolio of bonds with varying interest rates and maturity dates. You must be aware, however, that a bond mutual fund does not have the same characteristics as an individual bond. Bond mutual funds do not offer a fixed interest rate and never mature.