Q: Do money market funds, certificates of deposits and bonds pay the same amount of interest?
I.G.C., 35, Altamonte Springs
A: Typically not. Since money market funds are liquid and don't fluctuate in value, they yield the lowest of these three. The date of maturity of the CD or bond would determine the yield with these two.
Also included in the equation is the rating of the bond (the higher the rating the lower the yield and vice versa) and whether the bond is taxable or tax exempt. Taxable bonds will usually yield more than comparable tax exempt bonds.
Q: I am 68 and very concerned about required minimum distribution, I am afraid I will have to take it out all at once when I am 70½.
L.N., 68, Eustis
A: You don't have to take it out all at once when you turn 70½. The RMD is a percentage based on the rest of your life expectancy. You could take some out now but whatever you take out will be added to your taxable income.
Q: What's the difference between coupon rate and yield to maturity in a bond? A bond that I'm looking at has a coupon rate of 4.25 percent, but a yield to maturity of 0.45 percent.
D.N., 65, Lake Mary
A: The coupon rate is the interest rate stated on the bond, which is determined when it was first issued. The yield to maturity is the actual rate of return you would earn if you bought the bond today and held it until it matures. In your example, the 4.25 percent was the original rate of interest on the bond and the amount of cash flow it will pay ($42.50 on a $1,000 face value).
However, yield to maturity takes into consideration the current price on the bond. If you buy the bond, you will receive the $42.50 annually, and at maturity you will receive the face value, or $1,000. That calculates to a yield to maturity of 0.45 percent.
Have a question? E-mail us at email@example.com. Include your name (only your initials will be printed), hometown and phone. Questions are answered by Certified Financial Planners from the Central Florida Chapter of the Financial Planning Association. Answers are for educational purposes only. Please consult your financial professional. Questions and answers may be edited for space considerations.
Ask an expert