Municipal Bond Forum
Step-up CDs
Q
My wife and I have $2 million invested in various forms of fixed income. What do you think of step-up CDs and corporate notes? We are looking at Toyota with a term of 20 years. The rate of 8.56% is guaranteed for the first year. Our goal is to realize as much income as possible while alive and protect the principle that will be left to our heirs when we die. The survivor option is a plus. A major risk that I see is a negative yield curve. Is there something additional that should be considered?
A
James A. Klotz responds:
Since your objective is maximizing income for an extended period of time, you may be under-emphasizing the importance of the lack of call protection with step-up CDs and the Toyota issue you mentioned. (By the way, we don’t see the new Toyota 8.625% issue having a survivor’s option.)
The problem we see with both classes of securities is that your bonds or step-up CDs will be called precisely when you don’t want them to be – when rates are lower and reinvestment at a comparable rate is not possible.
If your tax bracket is not a consideration, we would suggest a corporate bond with adequate call protection to guarantee your income for a reasonable period of time.
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