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Wondering if you should stash your money in a CD or a bond? They’re both low-risk investment vehicles designed to help you reach your mid-term financial goals. But CDs are like savings accounts, while bonds are a type of loan.
CDs and bonds are both fixed-income investments known for having low risk and steady rates of return. But there are some key differences between the two.
CDs | Bonds | |
---|---|---|
Term length | 3 months to 5 years | 1 year to 30 years |
Interest rates | Generally lower than bonds | Generally higher than CDs depending on the risk level |
Risk | None | Government bonds: LowCorporate bonds: Low to high depending on company |
Funds held at | A bank or credit union | The company or government entity that issued the bond |
Insured funds | Yes | No |
CDs are held at a bank or credit union and have three-month to five-year terms. In general, you’ll earn a higher interest rate with longer terms.
When you purchase a bond, you’re loaning a company or the government money. Terms range from one year to 30 years.
Keep the following factors in mind when you compare CDs and bonds:
CD rates rise as interest rates rise. But bonds do the opposite:They decrease in value when interest rates rise.
This means if interest rates are currently high, CDs may offer more attractive rates. If interest rates are low, bonds may offer a better deal.
Keep current interest rates in mind as you shop around for CDs and bonds. One could offer better rates at any given time.
Financial institutions set their own fees for CDs, so you’ll have to compare institutions for the best deals.
Bonds may be subject to broker fees if you buy and sell them on the secondary market. If you buy them directly from the issuer on the primary market, you won’t pay any fees.
If there’s a chance you may sell your bond before maturity, compare rates for different brokers.
How soon you need your money may influence which investment account you go with. If you’re looking to park your money for 20 years, a bond may be the better option because CDs have shorter terms.
If you’ll need the money in five years and don’t want to risk losing principal, you may want to choose a CD.
Determine how soon you’ll need your money, then compare accounts from there.
CDs have virtually no risk because deposits are insured by the FDIC or NCUA.
There are many different types of bonds, each with its own level of risk.
Government bonds are safest, while corporate bonds are only as strong as the companies that back them. If you find a bond with a higher interest rate, it’s more than likely a riskier investment.
Before you choose an account, weigh the risk against your plan and goals to decide which is best for you.
Both CDs and bonds earn interest, but you can only touch CD interest once it reaches maturity. The only exception is if your bank lets you transfer interest payments to a different account.
Bonds pay interest on a scheduled basis, which could be as often as every month or twice a year. If you’re looking to receive interest payments now, bonds may be the way to go.
CDs are less risky than bonds, but they come with lower interest rates and a penalty for accessing funds before maturity. Bonds may carry more risk, but they offer more variety and you can sell them before maturity.
Both accounts have benefits and drawbacks. But the right one depends on your needs and goals. Consider each account type carefully before you choose.
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