Stock Market

If you want the guarantee of the federal government but aren't willing to venture into buying Treasuries, consider your old pal the certificate of deposit. After all, CDs can be purchased in maturities up to 10 years, and for specific sums once you clear the minimum (usually $1,000). The first $100,000 is completely guaranteed by the federal government.

CD rates are currently quite low, so this might be a good time to gather up your courage and visit the Treasury online and learn how to purchase Treasury notes. It's really not that tough, we promise!

Nevertheless, CDs offer an interesting alternative to shorter-maturing government securities. And, if you buy at your local bank, you have the added convenience factor. CD rates tend to be competitive with government paper, especially Treasury bills, but you may need to shop around to determine which bank offers the best deal. The only problem with CDs is the penalty you incur (usually three to six months of interest, depending upon maturity) if you sell prior to maturity. Unlike the new I bonds, they don't offer any protection against inflation.

Municipal bonds are issued by city, county, and state governments. The proceeds of the issue are often used for projects such as building a hospital, facilities for public schools, or improving infrastructure. Unlike corporate bonds, the interest income investors receive from "munis" are free from federal taxes; sometimes, even the state taxes are waived if the investor resides in the state that issued the bonds!

There are two broad categories into which municipal bonds fallgeneral obligation (GO) and revenue. The difference arises from the source of repayment. GO munis are backed by the power of an entity to tax whereas revenue bonds rely on the operations of an underlying business such as a hospital or utility.

It is much more difficult to secure information on municipal issues than it is, say, the bonds of General Electric. As a result, you need to do two things:

Examine the credit rating assigned to a municipal bond. Don't even think about buying something that is outside of investment-grade range.

Some municipalities will lower their cost of borrowing by paying for bond insurance. The result is that youthe investorcan buy munis that are guaranteed by a third party; meaning that if the bond issuer defaults, the insurer steps in and foots the bill to ensure that you get your money.

TIP: The difference between general obligation and revenue municipal bonds is the source of repayment. GOs rely on the taxing power of the issuer, whereas revenue munis are operations of an enterprise such as a hospital.