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Compare Bonds vs. CDs

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

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 is a CD and a bond?

A certificate of deposit (CD) is a type of savings account issued by banks and credit unions that generally pays a higher interest rate than a regular savings account. You can open a CD account with a term as short as 30 days or as long as 10 years. Your money is locked away during this time, and in return, you’ll earn a guaranteed interest rate on your principal until the term is up.

A bond is a debt instrument issued by governments and companies to raise funds. You agree to loan money for a specific period of time in exchange for an interest rate. Bonds have ratings based on the creditworthiness of the issuer because they’re only as safe from losses as the organization that backs them.

What’s the difference between bonds vs CDs?

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.

Term length3 months to 5 years.1 year to 30 years.
Interest ratesThe national average ranges from 0.17% to 0.75%, depending on the CD term.
  • I Bonds: 9.62% APY until October 31, 2022
  • EE Bonds: 0.10% APY until October 31, 2022
  • Other government Bonds: 3.52% APY
  • AAA 3-year Municipal Bonds: 3.30% APY
RiskLow-risk investment as yields are fixed for the duration of the CD term and backed by the FDIC or NCUA.
  • Government bonds: Low-risk investment as the bond is backed by the federal government
  • Corporate bonds: Low- to high-risk investment depending on the issuing company’s creditworthiness and market conditions. Corporate bonds aren’t backed by the FDIC or NCUA, so you may lose money if the issuing company defaults on the bond repayments.
Funds held atA bank or credit union.The company or government entity that issued the bond.
Insured fundsInsured up to $250,000 by the FDIC or NCUA.Funds aren’t insured.
PenaltiesEarly withdrawal penalty of at least 7 days simple interest, a minimum set by Federal law. Banks may set stricter penalty fees as there’s no maximum penalty limit.
  • Government bonds: Penalty of 3 months interest if bond is closed before 5 years.
  • Corporate bonds: No withdrawal penalties.
How often interest is compoundedDaily or monthly depending on the bank/credit union and type of CD.
  • Series I and EE bonds: Interest earned every month, compounded every 6 months.
  • Treasury notes, bills and bonds: Interest doesn’t compound.
  • Corporate bonds: Generates simple interest.
Tax implicationsInterest earned on a CD must be reported on your taxes for that year.
  • Series I and EE bonds: Subject to federal taxes, often exempt from state and local taxes.
  • Treasury notes, bills and bonds: Subject to federal taxes, often exempt from state and local taxes.
  • Corporate bonds: Subject to federal and state income tax.
  • Municipal bonds: Subject to capital gains tax.

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.

Bonds vs. CDs: Which one’s safer?

While both bonds and CDs are safer choices than stocks or mutual funds, CDs may be a slightly safer investment because:

  1. CDs are insured. The FDIC or NCUA protects your CD principal and guarantees your interest. Bonds, on the other hand, aren’t insured. If your bond issuer goes belly up, your bond’s value could decline and you may end up losing money when it’s time to repay your bond.
  2. CDs are more liquid. If you need your money back from a CD, you can cash out at any time. You’ll get whatever interest you’ve earned minus any applicable early withdrawal penalty. But if you need to sell your bond before it’s due, you must have a buyer lined up. So your money may be trapped if you can’t find a buyer, or you may lose money if you can’t get the same price that you paid.

Bonds vs. CDs: Which one is best for me?

Both bonds and CDs are low-risk investments that lock away your money for a specific amount of time. Which one you choose depends on your risk appetite and how much control you want over your money.

  • Choose a CD if you want a hands-off investment option. It’s a good choice if you already have a good chunk of money saved in a savings account and want to set aside a little extra in a CD with a higher interest rate. But if you withdraw your money before your CD term is up, you’ll pay a penalty.
  • Choose a bond if you want more flexibility over your money. If you need to cash out sooner, you can sell your bond on the secondary market before its maturity date with no penalty. But if interest rates have dropped, you may lose part of your principal.

Compare top-rated CDs

1 - 6 of 6
Name Product 6-month APY 1-year APY 5-year APY Minimum deposit to open
Barclays Online CDs
Finder Rating: 4.5 / 5: ★★★★★
Barclays Online CDs
Get competitive rates on CD term lengths from 3 to 60 months. A reliable and secure way to see your money grow.
CIT Bank Term CDs
Finder Rating: 3.5 / 5: ★★★★★
CIT Bank Term CDs
Choose from a range of terms with no maintenance fees and $1,000 minimum to open.
Bread Savings CDs
Finder Rating: 3.8 / 5: ★★★★★
Bread Savings CDs
With a $1,500 minimum deposit, you'll receive competitive interest rates and no hidden fees with this CD. FDIC insured.
Quontic Bank CD
Finder Rating: 5 / 5: ★★★★★
Quontic Bank CD
Lock in a high rate. Minimum of $500 required to open. Open your account in 3 minutes or less
State Exchange Bank CD
Finder Rating: 1.5 / 5: ★★★★★
State Exchange Bank CD
Locally-owned independent community bank. FDIC insured. No fees.
Discover CDs
Finder Rating: 3.8 / 5: ★★★★★
Discover CDs
Start saving with $2,500 and enjoy flexible terms from 3 months to 10 years with no account fees.

Compare up to 4 providers

5 ways to compare bonds vs. CDs

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

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

Frequently asked questions

Are bonds better than CDs?

It depends. You can use both for short-term or long-term investing.

If you know exactly when you’ll need the money, choose whichever one offers the highest return. If you don’t know when you’ll need the money, you may consider bonds.

Are bonds safer than stocks?

Generally, bonds are safer than stocks. If a company goes under, it pays bondholders back before shareholders.

How do I buy bonds?

If you’re looking for new-issued bonds, you’ll shop for them directly from the issuer on the primary market. For example, you can purchase US Treasury Bonds at TreasuryDirect, a government website.

You can purchase secondhand bonds through any online broker, but you’ll likely pay a markup price to cover commission.

Can I lose money in a CD?

No. Money in a CD is guaranteed to earn interest at the given rate. The only way you may lose money is if you withdraw funds early and have to pay a penalty.

Do I have to pay taxes on a CD when it matures?

You’ll pay taxes on interest in the year you earn it. For example, if you earn $50 in interest in 2022 and your CD matures in 2024, you’ll report it on your 2022 return.

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