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Compare CD vs. bond

Both are low-risk investment options, but which one is right for you?

Cassidy Horton
Cassidy Horton

Updated

Fact checked

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.

What's in this guide?

What’s the difference between a CD and a bond?

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.

CDsBonds
Term length3 months to 5 years1 year to 30 years
Interest ratesGenerally lower than bondsGenerally higher than CDs depending on the risk level
RiskNoneGovernment bonds: LowCorporate bonds: Low to high depending on company
Funds held atA bank or credit unionThe company or government entity that issued the bond
Insured fundsYesNo

Pros and cons of CDs

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.

CD pros

  • Guaranteed returns. CDs are appealing because they produce guaranteed, fixed-rate returns.
  • Insured deposits. CDs are a type of savings account, so your funds are insured up to $250,000.
  • Low risk. Because you’re keeping your money at an insured financial institution, there’s little to no risk.
  • Locked-in interest rates. If you lock in a high APY and interest rates decrease, you’ll keep the higher rate.

CD cons

  • Lower interest rates. CDs generally have lower interest rates than bonds, although this isn’t always the case.
  • Money is locked up until maturity. There are a few no-penalty CDs out there, but you’ll pay a fee if you need to access your funds before the maturity date.
  • Conditions vary by institution. Each financial institution sets its own interest rates and minimum deposit requirements, so conditions vary.
  • Growth doesn’t outpace inflation. If you lock in a 2.0% APY, it may not be high enough to outpace an average 3.0% inflation rate.

Pros and cons of bonds

When you purchase a bond, you’re loaning a company or the government money. Terms range from one year to 30 years.

Bond pros

  • Higher interest rates. Corporate bonds typically have higher interest rates than CDs and government bonds, but they’re also riskier.
  • Can sell before maturity. You can sell the bond before maturity without penalty. But you may lose money if the bond’s value has decreased.
  • Variety of bond types. You can choose from municipal bonds, corporate bonds, treasury securities and more.
  • Can diversify. If you’re looking to spread out risk, you can purchase low-cost bond mutual funds, which are made up of hundreds of individual bonds.

Bond cons

  • Risk of default. When you purchase a bond, you’re lending money to an entity and there’s no guarantee they’ll pay it back.
  • Bond values fluctuate. The value of a bond increases and decreases as interest rates change, so you may lose money if you sell your bond before maturity.
  • Hard to compare. There are many different types of bonds making it difficult to choose and compare them.
  • Broker fees. You may pay fees if you want to buy or sell bonds on the secondary market.

Compare top-rated CDs

Name Product 1-year APY 18-month APY 2-year APY 3-year APY 5-year APY
CIT Bank Term CDs
CIT Bank Term CDs
0.3%
0.3%
0.4%
0.4%
0.5%
Choose from a range of terms with no maintenance fees and $1,000 minimum to open.
Go to site
More Info
Radius Bank CDs
Radius Bank CDs
0.5%
0.5%
0.5%
0.5%
0.5%
Enjoy a low minimum deposit of $500 and earn 0.5% APY on your balance. Apply online for 1 year, 18 month and 3 year terms.
Go to site
More Info
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Compare up to 4 providers

How to compare CDs with bonds

Keep the following factors in mind when you compare CDs and bonds:

Interest rates

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.

Fees

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.

Maturity dates

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.

Risk

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.

Recurring income

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.

Bottom line

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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