The Federal Deposit Insurance Corporation (FDIC) insures your bank account assets (checking or savings). SIPC insurance, on the other hand, safeguards your brokerage account assets. These two types of insurance work in completely different ways. Let’s look at how they safeguard you.
What is FDIC insurance?
The Government Deposit Insurance Corporation (FDIC) is a federal agency that protects customers in FDIC-insured banks from losing their deposit accounts (such as checking and savings). Here are some key points to remember about FDIC insurance:
- The FDIC’s basic insurance limit for deposit accounts is now $250,000 per account holder per insured bank, and $250,000 for certain retirement funds deposited with an insured bank. These insurance limitations cover both the principal and the interest that has accrued.
- Even if these assets were purchased from an insured bank, the FDIC does not protect money invested in stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds.
Putting your money in an FDIC-insured bank is always a good idea. There’s no need to take undue risks with your emergency fund or short-term funds.
How is FDIC insurance coverage determined?
Each bank’s FDIC insurance limit applies to each account holder. The FDIC defines coverage for various account holders based on some common ownership types as follows:
- A single account is a deposit account (such as a checking or savings account) that is owned by only one person. For all single accounts at each bank, FDIC insurance covers up to $250,000 per owner.
- Deposit accounts held jointly by two or more people are known as joint accounts. For all joint accounts at any bank, FDIC insurance covers up to $250,000 per owner.
- The FDIC insures certain retirement accounts, such as IRAs and self-directed defined contribution plans, up to $250,000 for all deposits in such accounts at each bank.
What is SIPC insurance?
The Securities Investor Protection Corporation (SIPC) is a federally chartered nonprofit membership organization founded in 1970.
SIPC, unlike the FDIC, does not offer blanket coverage. SIPC, on the other hand, protects consumers of SIPC-member broker-dealers if the firm goes bankrupt. Coverage for all accounts at the same institution is up to $500,000 per customer, with a maximum of $250,000 for cash.
SIPC does not provide protection to investors if their investments lose value. This makes logic when you think about it. After all, market losses are an unavoidable component of the investment risk.
How much of municipal bonds are insured?
For one thing, according to Bob DiMella and John Loffredo, co-heads and co-chief investment officers of MacKay Municipal Managers, the initial analysis of muni defaults was done at the height of Covid-19 shutdowns in March. In the meanwhile, not every market niche has been squeezed. Public utilities have fared well, and public schools should profit from the housing market’s sustained strength. Pension plans, on the other hand, have benefited from the rising stock market.
Municipal bonds with an insurance wrapper, however, may be worth a closer look for many investors, particularly those who buy and hold individual bonds.
“It’s a belt and suspenders bond,” DiMella explains. “You have the underlying credit, as well as this financial guarantor as a backstop.”
Bond insurance, as the name implies, ensures that the principal and interest on a municipal bond be paid if the issuer defaults. Before the financial crisis, DiMella notes, such insurance was widely employed, with a handful of companies insuring around 60% of all new municipal bond offerings.
“After the crisis, it literally plummeted off a cliff,” he says, with insurance wraps accounting for a miniscule percentage of the market.
Insured municipal bonds had been slowly resurgent in recent years, but the Covid-19 outbreak has sparked renewed interest, with insured munis accounting for roughly 10% of new muni bonds. To assuage investor concerns about rating downgrades and defaults, more major and high-quality issuers are including an insurance component in new bonds. Most bonds are now insured by two companies: Assured Guaranty and Build America Mutual.
Investors gain from stable ratings, better liquidity, and lower volatility, according to Loffredo.
Of course, insurance is never free. For muni bonds wrapped with insurance, investors will often give up between 10 and 20 basis points (1/10th and 1/20th of a percentage point) of yield. While some investors may object at this tradeoff, particularly in a low-yield situation, buy-and-hold investors may find it well worth their money.
“You don’t have to give up a lot of yield to receive the benefit of stable cash flow,” Loffredo says, adding that high-net-worth clients and family offices have recently showed an increased interest in insured munis.
While municipal bond insurance is a low-cost option for investors who keep bonds until they mature, active investors may benefit from price appreciation.
“We would argue that there is far more value today than there was at the start of the year,” DiMella says. “They’re wider in many situations than they’ve been in many years.”
Almost every section of the muni market was hit when the market first went off this spring. Insured munis recovered faster than comparable bonds, although spreads for triple-B-rated insured munis are still greater now than they were at the start of the year.
In fact, the guaranteed index’s gap over 10-year Treasuries started the year at 20 basis points and quickly grew to 190 basis points during the spring market turmoil. They’ve now reduced to 99 basis points, but the spread is still wider today than it was before the crisis, implying that rates will fall and bond prices will rise.
The FDIC does not protect which of the following?
Institutions are increasingly giving consumers a wide range of non-deposit investment products, such as mutual funds, annuities, life insurance plans, stocks, and bonds. These non-deposit investment products, unlike standard checking and savings accounts, are not insured by the FDIC.
Mutual Funds
Mutual funds are occasionally preferred above other investments by investors, presumably because they guarantee a larger rate of return than, say, CDs. And, because you own a piece of a lot of companies rather than a chunk of a single enterprise, your risk – the chance of a company going bankrupt, resulting in the loss of investors’ assets – is spread out further with a mutual fund, such as a stock fund. A mutual fund management can invest the money of the fund in a number of industries or multiple companies within the same industry.
Alternatively, you might put your money in a money market mutual fund, which invests in short-term CDs and assets like Treasury bills and government or corporate bonds. A money market mutual fund is not to be confused with an FDIC-insured money market deposit account (explained above), which earns interest at a rate set by the financial institution where your funds are put and paid by them.
Before investing in a mutual fund, you can – and should – receive definite information about it by reading a prospectus, which is accessible at the bank or brokerage where you wish to conduct business. The most important thing to remember when buying mutual funds, stocks, bonds, or other investment products, whether at a bank or elsewhere, is that the funds are not deposits, and hence are not insured by the FDIC or any other federal agency.
Securities held for your account by a broker or a bank’s brokerage division, including mutual funds, are not protected against loss of value.
The market demand for your investments might cause the value of your investments to rise or fall.
If a member brokerage or bank brokerage subsidiary fails, the Securities Investors Protection Corporation (SIPC), a non-government institution, replaces lost stocks and other securities in customer accounts held by its members up to $500,000, including up to $250,000 in cash.
For additional information, please contact:
Treasury Securities
Treasury bills (T-bills), notes, and bonds are examples of Treasury securities. T-bills are often obtained through a bank or other financial institution.
Customers who buy T-bills from failing banks are anxious because they believe their actual Treasury securities are held at the collapsed bank. In fact, most banks purchase T-bills by book entry, which means that an accounting entry is kept electronically on the Treasury Department’s records; no engraved certificates are given. The consumer owns the Treasury securities, and the bank is only serving as a custodian.
Customers who bought Treasury securities from a bank that goes bankrupt can get a proof-of-ownership document from the acquiring bank (or the FDIC if there isn’t one) and redeem the security at a Federal Reserve Bank near them. Customers can also wait for the security to mature and get a check from the acquiring institution, which may become the new custodian of the collapsed bank’s T-bill client list automatically (or from the FDIC acting as receiver for the failed bank when there is no acquirer).
Despite the fact that Treasury securities are not covered by federal deposit insurance, payments of interest and principal (including redemption proceeds) on those securities that are deposited to an investor’s deposit account at an insured depository institution are covered by the FDIC up to a limit of $250,000. Even though Treasury securities are not insured by the federal government, they are backed by the United States government’s full faith and credit, which is the best guarantee available.
Safe Deposit Boxes
The FDIC does not protect the contents of a safe deposit box. (Read the contract you signed with the bank when you rented the safe deposit box to see whether any form of insurance is given; depending on the circumstances, some banks may provide a very limited reimbursement if the box or contents are damaged or destroyed.) If you’re worried about the safety or replacement of valuables you’ve stored in a safe deposit box, fire and theft insurance can be a good idea. Separate insurance may be offered for certain dangers; check with your insurance agent. Typically, such coverage is included in a homeowner’s or renter’s insurance policy for a property and its contents. For further information, contact your insurance representative.
In the event of a bank failure, an acquiring institution would most likely take over the failing bank’s offices, including safe deposit box sites. If no acquirer is located, the FDIC will issue instructions to boxholders on how to remove the contents of their boxes.
Robberies and Other Thefts
A banker’s blanket bond, which is a multi-purpose insurance policy purchased by a bank to defend itself from fire, flood, earthquake, robbery, defalcation, embezzlement, and other causes of losing funds, may cover stolen funds. In any case, a fire or a bank robbery may result in a loss for the bank, but it should not result in a loss for the bank’s clients.
If a third party acquires access to your account and transacts business that you do not approve of, you must notify your bank as well as the appropriate law enforcement authorities in your area.
Not FDIC-Insured
- Whether purchased from a bank, brokerage, or dealer, mutual funds (stock, bond, or money market mutual funds) are a good way to diversify your portfolio.
- Whether purchased through a bank or a broker/dealer, stocks, bonds, Treasury securities, or other investment products
For More Information from the FDIC
Monday through Friday, from 8 a.m. to 8 p.m. Eastern Time, dial 1-877-ASK-FDIC (1-877-275-3342).
Request a copy of “Your Insured Deposits,” which covers all of the ownership categories in detail, or contact 1-877-275-3342 toll free.
Use the FDIC’s on-line Customer Assistance Form to send your queries by e-mail: FDIC Information and Support Center
This website is meant to provide non-technical information and is not intended to be a legal interpretation of FDIC laws and practices.
Which of these assets is not insured by the Federal Deposit Insurance Corporation (FDIC) yet is nonetheless regarded a relatively safe investment option?
The simplest and most convenient way to invest your money is through a . Which of these investments is not insured by the Federal Deposit Insurance Corporation (FDIC) yet is nonetheless regarded a relatively safe investment option? Mutual funds that invest in money markets. You have $5,000 to put into the market.
Is it possible to lose money on municipal bonds?
These funds have a low risk of losing value, and the interest they pay is consistent. They also pay a very low interest rate as a result of their safety. Risk and reward are inextricably linked: a lesser risk equals a lower payoff.
Are municipal bonds inherently more secure than corporate debts?
When deciding whether to purchase corporate or municipal bonds, there are a number of considerations to consider. The quality of the corporation issuing the bond, the tax consequences, yield, liquidity, and how the money earned through the issuance of the bond will be used are some of the most important of these variables.
Quality of Issuer
The issuer’s quality is one of the first things you should look into before buying a bond or any other financial instrument. Bond issuers will have varying credit ratings, which means that investing in the securities they’ve made accessible exposes you to credit risk.
Bond issuer credit ratings are provided by two agencies: Moody’s and Standard & Poor’s. The rating scale used by Moody’s spans from C to AAA, with AAA being the highest attainable grade. Standard & Poor’s has a rating system that ranges from D to AAA, with AAA being the highest attainable rating.
Higher ratings indicate that the bond’s issuer is less likely to default. After all, individuals who invest in the security stand to lose if the corporation that issued it fails to meet its obligations.
Corporate Bonds Come With Higher Default Rates
Corporations issue corporate bonds, and each corporation is distinct. Some people make more money than others, some have superior management teams, and some will continuously fulfill their duties while others will fail.
Instruments issued by corporations have a higher default risk than municipal bonds, therefore it’s very crucial to pay attention to how rating agencies grade the bond before you invest.
The good news is that even businesses rarely go bankrupt. Only approximately 0.13 percent of companies that issue bonds default, according to the Corporate Finance Institute.
Tax Implications
You must pay taxes on all income you earn, whether it is from a side hustle, your day job, or investment returns. However, not all forms of income are taxed in the same way. When determining whether to invest in corporate or municipal bonds, consider the following tax effects.
How Corporate Bonds Are Taxed
Corporation-issued bonds are sometimes referred to as taxable bonds since the revenues earned from these investments are subject to both federal and state income taxes at the general income tax rate. Your tax bracket determines the exact rate you’ll pay on your returns.
How Municipal Bonds Are Taxed
Gains from municipal bond investments are always tax-free on the federal level and are frequently tax-free on the state level as well. The tax exemption is effectively a “thank you” from both the federal and local governments for investing in projects that benefit your community with your money.
While munis are immune from state and local taxes in the vast majority of circumstances, this is not always the case. If you buy a municipal bond from a municipality other than the one where you live, for example, your local authorities may choose to tax the bond’s returns at the usual local income tax rate.
For example, if you live in New York City and invest in a municipal bond issued by a government body in Florida, New York City may charge you its standard local tax rate on the investment’s profits.
Yields
Bond yields fluctuate dramatically based on the credit of the issuing institution, the maturity period of the bond, and other considerations.
In general, the following is how corporate and municipal bond yields compare:
Corporate Bonds Generally Have Higher Yields
Local governments are well-respected institutions with a track record of good financial management. Corporations, on the other hand, will have a wide range of financial strength and creditworthiness.
Corporate bonds have higher interest rates than government bonds because companies are typically less creditworthy than governments. After all, if corporate bond yields were the same as government bond yields, no one would lend to riskier businesses. Who wants to buy a corporate bond when you may get the same returns by investing in lower-risk municipal bonds?
Munis Provide Small Gains
Bonds issued by the government have a lower risk of default, making them a safer option for investors. When it comes to investing, however, safer options tend to yield lesser returns, and municipal bonds are no exception.
These bonds’ pricing takes into account the extremely minimal default risk, resulting in lower interest rates, smaller interest payments, and poorer overall returns.
That is, until taxes are included in. A high-income earner, for example, may discover that municipal bonds are a better fit because they are tax-free on both the state and federal level. For an investor in the highest tax bracket, however, much of the profit on corporate bonds would be wiped out by taxes.
Liquidity
Whether investing in bonds or any other asset, investors should constantly consider liquidity. The ease or difficulty of changing an investment back into cash, if desired, is referred to as liquidity.
Bonds with low liquidity will be difficult to convert into cash before their maturity dates, whereas bonds with high liquidity will be easy to dump and change into spendable money on demand.
Corporate Bonds Are Often Less Liquid
While any type of bond can be sold on the secondary market, there must be a buyer for the bond to be sold. Investments in high-risk bonds and other corporate bonds may become illiquid in some situations if no other investors are interested in buying them.
Furthermore, when the economy and markets are doing well, bond liquidity decreases. During bull markets, investors prefer not to have their money invested in fixed-income assets, preferring instead to focus on the higher return potential of equities.
Municipal Bonds Are Highly Liquid
The municipal bond market is quite active, and municipal bonds are often easier to sell than corporate bonds. Because muni bonds are issued by entities that are almost certain to meet their commitments while also delivering tax benefits, they are appealing investments for high-income individuals.
How Funds Are Used
Investors are becoming increasingly worried about how their money is being used. In fact, there’s a whole industry devoted to social impact investing, which is investing in assets that use your money to help causes you care about.
So, when you invest in these two different sorts of bonds, how is your money spent?
How Corporations Use Money Raised Through Bond Sales
Corporations may need to raise capital for a variety of reasons. The following are a few of the most common:
- Working Capital is a term used to describe the amount of money Making money takes money, and maintaining a business can be a costly task. Corporations may need working capital for general purposes if their money is locked up in inventory, new equipment, and other assets required to keep them moving in the correct direction. Companies can issue bonds to raise cash for immediate operational requirements while pledging to repay investors later.
- Acquisitions. Companies frequently merge with one another, resulting in deals in which the total worth of all pieces exceeds the value of the original assets. Acquisitions, on the other hand, are a costly business, and companies frequently require additional capital to complete merger and acquisition deals.
- Research. Almost every publicly traded firm on the market today spends a significant amount of money on research and development. Corporations may issue bonds to fund this research in some instances.
How Municipalities Use Money Raised Through Bond Sales
The vast majority of government-issued bonds are used to fund public-sector initiatives.
When a major thoroughfare is riddled with potholes or your county’s library needs to be repaired, for example, governments frequently issue bonds to cover the costs of these projects. Governments can repay investors either through project revenue or tax revenue generated by the projects they fund.
What motivates insurance firms to purchase municipal bonds?
Municipal bonds, with their particular credit profile, can help diversify credit risk in broad fixed income portfolios. Municipal exposure allows insurers to keep their rating quality high without sacrificing significant profits.