Certificates of deposit (CDs) and bonds are known to be low risk as they typically are designed to return your principal, generally pay higher interest rates than traditional savings accounts, and offer fair returns. You’re able to tuck away excess cash, watch it grow at a set term and interest rate, and be confident that your money is safe.
Not a bad way to make a little extra cash, right? But choosing between a CD and a bond is more than a coin toss. Here are some significant differences that can help you decide which one may benefit you depending on your savings goals.
What are CDs?
A CD is a bank account with an interest rate that is generally higher than a regular savings account. CDs typically have a fixed-term length, fixed-term rate, and fixed date of withdrawal, known as the maturity date, and generally have a minimum and maximum dollar amount requirement to open. Keep in mind it’s best to keep your funds in a CD until it’s reached maturity as most financial institutions charge a fee when you withdraw funds from your CD before its term ends.
CDs can be opened at a bank or credit union – also considered share certificates – and are considered low risk as they typically guarantee your account balance up to $250,000 (potentially more depending on your account structure) with banks who are members of the Federal Deposit Insurance Corporation (FDIC) or credit unions who are insured by the National Credit Union Association (NCUA). To maximize your savings, and find the best cd rates, check out our CD rate calculator.
Bonds are a type of loan, where you, the bondholder, loan money to a company, government entity, or organization that issues bonds in exchange for that money. Bonds are sold to raise funds to help finance government or corporate operations. You lend a fixed amount to the entity of your choice for a fixed term and coupon rate. The coupon rate, like a CD interest rate, is the interest paid by the bond issuer and is calculated on the bond’s face value (or par value), not on the issue price or market value. During the bond term, you will receive fixed annual or semi-annual interest payments and at the end of the bond term, the entity that issued the bond returns the principal in full.
Treasury bonds are the most common bonds and they can be bought individually – in $1,000 increments — or through investments like bond exchange-traded funds (ETFs) and bond mutual funds – if you have less than $1,000 to invest or prefer to diversify your holdings. U.S. Savings bonds have a minimum of $100 and can be bought on TreasuryDirect.gov.
You can sell bonds before maturity typically through the brokerage where the bond was purchased. However, the risk of selling a bond before maturity is that it could be costly – especially when interest rates increase, and new bonds have higher coupon rates than the original bond.
While Treasury bonds aren’t directly insured by the FDIC, they are generally considered safe as they are backed by the United States government.
CDs vs. Bonds
Both CDs and bonds earn interest on the principal at a fixed rate and fixed term, but the main difference between them is that CDs earn interest on a deposit account at a financial institution while bonds earn interest by loaning money to a government or company.
Below are typical key factors and terms that will help align your needs with the option that will best help you achieve your savings goals:
| CDs | Bonds | |
| Minimum Deposit | Most require $500-$2,500 (depending on the financial institution) | $100 for U.S. Savings Bonds; $1,000 for individual bonds; Varies if bought as a bond mutual fund or ETF |
| Terms | 3 months to 5 years | 3 years to 30 years |
| Insurance | FDIC and NCUA insured up to $250,000 | None |
| Liquidity | Withdrawing before maturity may incur an early withdrawal penalty fee. | Ability to buy and sell before maturity but could be costly if interest rates increase and new bonds have higher coupon rates than original bonds. |
| Flexibility | None. Generally, term length and interest rate are fixed upon opening (unless you buy a no-penalty or add-on CD) | Bonds are classified by maturity short- (less than three years), medium- (four to 10 years), or long-term (more than 10 years) and can be bought and sold at any time. |
| Taxes | Earning from CDs are subject to both federal and state income taxes | Most bonds are subject to both federal and state income taxes; Treasury bonds are exempt from state income taxes |
| Risk to Principal | None, as long as you do not withdraw before maturity | Could lose principal if the bond issuer defaults. |
Which is right for you?
When opening a CD, it’s a great opportunity to earn more if you have a lump sum of money and have short-term goals you’d like to achieve — downpayment on a house, annual tax expenses, dream vacation, home remodel, or quarterly tuition, as well as long-term savings – retirement — as your funds are low risk, FDIC or NCUA insured, and you get a set return on your funds. But on the flip side, bonds have flexible liquidity giving you the ability to sell them on secondary markets, which offers faster access to cash as well as tax break opportunities offered by municipal bonds. Ultimately, choosing between a CD and a bond depends on your savings goals and the timeline in which you’d like to achieve them.
FAQs
What’s the main difference between CDs and bonds?
CDs earn interest on a deposit account at a financial institution, while bonds earn interest by loaning money to a government or company.
How do taxes work for earnings from CDs and bonds?
Earnings from CDs are subject to both federal and state income taxes. Most bonds are also subject to both federal and state income taxes, although Treasury bonds are exempt from state income taxes.
Which is more flexible, CDs or bonds?
Bonds offer more flexibility as they can be bought and sold at any time. CDs generally have fixed terms and interest rates, although options like no-penalty or add-on CDs provide some flexibility.
Which is better for short-term goals, CDs, or bonds?
CDs are a great option for short-term goals, offering low-risk investment with a set return. Bonds, with their flexibility, might be more suitable for those seeking faster access to cash.
