Certificates of deposit (CDs) and bonds are similar but not identical. They are both fixed-income securitiesthat the investor holds onto until their maturity dates. The investor puts money into a CD or a bond for a set period of time, and they get their money back when the time is up.
The investor is also paid interest. Both CDs and bonds are debt-based securities, and the investor is the creditor.
It’s really no different than having a friend ask for a $10 loan today and give you an IOU promising to pay $11 next week. The $1 interest is collected for the same reason that banks charge interest on loans: to compensate you for delaying your ability to make use of the money. You can’t spend that $10 when you don’t have it.
Key Takeaways
- Certificates of deposit (CDs) and bonds are both debt-based, fixed-income securities that investors hold until their maturity dates.
- CDs are considered risk free because their deposits are insured by the Federal Deposit Insurance Corp. (FDIC).
- Bonds are relatively risky and therefore usually pay higher interest than CDs.
- CDs are relatively short-term investments, while bonds usually have longer terms.
- Banks and credit unions are the primary issuers of CDs.
Bonds vs. CDs
Bonds and CDs fit under the same broad category of investment vehicles. Here’s how they differ.
Bond Risks and Rewards
Bonds are issued by companies or governments when they want to raise funds, for their ordinary operations or for a special project.
All bonds are awarded a rating by a bond rating agency according to the likelihood that the company or government that issues the bonds will default on their debts. There is a very low default risk for investment-grade bonds and a greater risk for so-called junk bonds.
The lower the risk, the lower the interest rate that the issuer will have to offer to find takers for their bonds.
A CD Is Like a Savings Account
The issuer of a CD is usually a bank or a credit union. It is more like a savings account than a loan.
Like a savings account, money in a CD is guaranteed by the Federal Deposit Insurance Corp. (FDIC) for deposits up to $250,000. Because it is literally as safe as the U.S. Mint, the CD pays a very modest interest rate.
The rate of return is a little better than a traditional savings account because the investor has promised to keep that money on deposit for a period of time, ranging from one month to five years. The investor can get the money out early only with a penalty.
The rate of return is lower than bonds would pay. The reason is the absence of risk.
As of May 18, 2022, the average interest rate was 0.24% for a one-year CD and 0.43% for a five-year CD.
People often refer to any fixed-income security as a bond, but that is technically incorrect. Bonds generally mature after 10 or more years, while CDs and other fixed-income securities tend to have shorter maturities.
Time to Maturity
This is the sticky—but also the most significant—part. Bonds are longer-term investments, with many maturing after 10 years or more. CDs mature in as little as one month, although they may go for five or even 10 years.
There are further distinctions or categories within the world of fixed-income debt securities. The loose categorization is as follows:
- Treasury bills (T-bills) generally mature in less than one year.
- Notes generally mature in one to 10 years.
- Bonds generally mature after a decade or more.
In other words, while a bond is technically a fixed-income security with a maturity of 10 years or more, people often use the term bond to refer to fixed-income securities in general—even for those securities with a maturity of fewer than 10 years.
What are the main differences between bonds and certificates of deposit (CDs)?
Bond issuers are primarily companies or governments raising money for their operations or for special projects. Banks and credit unions are the main issuers of certificates of deposit (CDs).
A CD is similar to a savings account. It’s a place to keep your money safe until you want to do something else with it.
Can CDs lose money?
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000, per depositor, per FDIC-insured bank, per ownership category, so they can’t lose value.
Which investment vehicles mature sooner?
Bonds are generally longer-term investments, generally maturing after more than 10 years. CDs mature in as little as one month and in as many as 10 years.
The Bottom Line
The difference in time commitment for bonds and CDs is best expressed in terms of the investor’s motives. CDs are short-term, low-risk, interest-paying storage for money until a more profitable investment or a better use for the money can be found. Bonds are long-term vehicles for a guaranteed profit and, for many investors, a safer haven to offset the risks of losses in other investments such as stocks.
FAQs
People often refer to any fixed-income security as a bond, but that is technically incorrect. Bonds generally mature after 10 or more years, while CDs and other fixed-income securities tend to have shorter maturities.
Is a certificate of deposit a type of bond? ›
Bonds vs. CDs. Here's the main difference between a bond and a CD: A bond is an investment that earns a fixed interest rate for loaning money to a company or government, while a CD is a deposit account at a financial institution that earns a fixed interest rate.
Are CDs as good as bonds? ›
CDs are an excellent place to park your cash and earn interest on your balance. Although there's a risk of inflation outpacing CD interest rates, they are virtually guaranteed earnings. Bonds, on the other hand, may deliver higher returns and regular income via interest payments.
What does a certificate of deposit CD usually have group of answer choices? ›
A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.
Is a CD like a savings bond? ›
Both are easy, convenient ways to invest without going through a broker. Your savings will be safe and earn interest. There are differences, though, and the biggest comes down to time. U.S. savings bonds are designed to be a long-term investment, while CDs can be found with maturities as short as one month.
What is a certificate of deposit classified as? ›
A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in the CD without taking a withdrawal for a specified length of time. Withdrawing money early means paying a penalty fee to the bank.
Is a bond the same as a deposit? ›
A bond is a sum of money (sometimes called a 'security deposit') that you pay to your rental provider or their real estate agent at the start of your lease. They must send your bond to the Residential Tenancies Bond Authority, where it's held for the duration of your tenancy.
Are CDs as safe as Treasuries? ›
CDs and Treasuries Offer a High Degree of Safety
Both CDs and Treasuries are considered extremely safe investments. Treasuries are backed directly by the federal government, while CDs are covered by FDIC insurance – which is also backed by the federal government.
Which bonds to buy in 2024? ›
The Best Bond ETFs for 2024's Economy
| Ticker | Fund | Expense Ratio |
|---|
| BLV | Vanguard Long-Term Bond ETF | 0.04% |
| ZROZ | PIMCO 25+ Year Zero Coupon US Treasury ETF | 0.15% |
| VCIT | Vanguard Intermediate-Term Corporate Bond ETF | 0.04% |
| IEF | iShares 7-10 Year Treasury Bond ETF | 0.15% |
6 more rowsAs of November 2023, the I bond rate has risen to 5.27%, and will remain as such until April 30, 2024. As of January 2024, short-term CDs – with terms of either six months or one year – offer similar return potential.
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers.
What are two major negatives of a certificate of deposit CD )? ›
Cons of Using a Certificate of Deposit for Savings
- Accessibility. With a savings account or money market account, you're allowed to make a certain number of withdrawals of cash or transfer funds to a linked checking account. ...
- Early Withdrawal Penalties. ...
- Interest Rate Risk. ...
- Inflation Risk. ...
- Lower Returns.
This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.
Do CDs count as bonds? ›
Certificates of deposit (CDs) and bonds are similar but not identical. They are both fixed-income securities that the investor holds onto until their maturity dates. The investor puts money into a CD or a bond for a set period of time, and they get their money back when the time is up.
Are I bonds better than CDs? ›
With CDs, you can get your money back at any time if you're willing to pay a penalty, but I bonds cannot be redeemed for at least one year. And if you cash out an I bond within the first five years, you'll pay a penalty. In a nutshell, I bonds are best used to protect against the long-term effects of inflation.
Is it safe to invest in bonds? ›
All bonds carry some degree of "credit risk," or the risk that the bond issuer may default on one or more payments before the bond reaches maturity. In the event of a default, you may lose some or all of the income you were entitled to, and even some or all of principal amount invested.
Is fixed deposit a type of bond? ›
Unlike bonds, FDs offer a fixed interest rate. Fixed deposit interest rates are relatively simpler than bond interest rates. Most banks offer similar FD interest rates. Some banks may offer a higher interest rate than others to attract depositors, but they are usually smaller banks with little brand recognition.
What is the certificate of a bond? ›
A bond is a debt certificate issued by a state, a public authority, a national or a private company to borrow funds for a defined period of time. When you subscribe to a bond, you loan money to the issuer.
What is the difference between a bond and a security deposit? ›
Landlords usually require tenants to pay a security deposit, also known as bond, before taking control of the property. This is to protect the landlord if you fail to meet your responsibilities as a tenant. Your landlord can ask you to pay a security deposit up to the maximum of four weeks rent.
What is bond and types of bonds? ›
Some Points To Remember About Bonds
The repayment done through a Traditional Bond is also known as Bullet Repayment. Bonds with a maturity period of 7 to 10 years are called “Notes”. The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds.
